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Entry and Exit Decisions with Switching Regime Excess Capacity

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  • Sheng-Ping Yang

    (Gustavus Adolphus College)

Abstract

This paper examines how expected excess capacity fosters impediments to entry and incentives to exit. To examine this phenomenon, we apply the switching regime methods of Goldfeld and Quandt to a logit model using data from the U.S. aluminum industry over the period 1954 through 2010. The results show that both entry and exit decisions are statistically significantly affected by excess capacity. However, the correlation of entry and exit with capacity is more significant than with production. The evidence implies that excess capacity in the aluminum industry rises to be a substantial threat to entry only when the company produces ahead of demand growth. Excess capacity is also an impetus to exit during the later stage after primary aluminum production reverts to a declining trend.

Suggested Citation

  • Sheng-Ping Yang, 2018. "Entry and Exit Decisions with Switching Regime Excess Capacity," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 24(4), pages 351-369, November.
    • Handle: RePEc:kap:iaecre:v:24:y:2018:i:4:d:10.1007_s11294-018-9716-6
    DOI: 10.1007/s11294-018-9716-6
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    References listed on IDEAS

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    Cited by:

    1. Wang, Zhan-ao & Zheng, Chengsi, 2022. "Is technological innovation the cure for overcapacity? Exploring mediating and moderating mechanisms," Journal of Business Research, Elsevier, vol. 147(C), pages 348-361.

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    More about this item

    Keywords

    Aluminum industry; Excess capacity; Logit analysis; Probability of entry and exit; Switching regimes;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L70 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - General

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