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Dynamic entry and exit with uncertain cost positions

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  • Hanazono, Makoto
  • Yang, Huanxing

Abstract

We study the dynamics of entry and exit based on firms' learning about their relative cost positions. Each firm's marginal cost of production is its own private information, thereby facing ex ante uncertainty about its cost position. The (inelastic) market demand can accommodate only a fraction of firms to operate, and thus only firms with relatively lower costs are viable in the long run. Some firms in the market will exit if excessive entry (or overshooting) occurs. We derive the unique symmetric sequential equilibrium. The equilibrium properties are consistent with empirical observations: (i) entry occurs gradually over time with lower cost firms entering earlier than higher cost firms, (ii) exiting firms are among the ones that entered later (indeed in the last period). Moreover, equilibrium overshooting probability is shown to always be positive and decreasing over time.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 3 (May)
Pages: 474-487

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Handle: RePEc:eee:indorg:v:27:y:2009:i:3:p:474-487

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Entry Shakeout Learning Cost positions;

References

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  1. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July.
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  17. Steven Klepper & Kenneth L. Simons, 2000. "The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 728-760, August.
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  19. Klepper, Steven & Miller, John H., 1995. "Entry, exit, and shakeouts in the United States in new manufactured products," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 567-591, December.
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Citations

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Cited by:
  1. Kitamura, Hiroshi & Miyaoka, Akira & Sato, Misato, 2013. "Free entry, market diffusion, and social inefficiency with endogenously growing demand," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 98-116.
  2. Bester, Helmut & Milliou, Chrysovalantou & Petrakis, Emmanuel, 2012. "Wage bargaining, productivity growth and long-run industry structure," Labour Economics, Elsevier, vol. 19(6), pages 923-930.
  3. Hiroshi Kitamura & Akira Miyaoka & Misato Sato, 2011. "Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand," Discussion Papers in Economics and Business 11-04-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Nov 2012.

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