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Opportunity Costs, Competition, and Firm Selection

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  • Gamal Atallah

Abstract

The paper questions the standard economic assumptions that competing economic agents have identical reservation utility levels, and that when differences in opportunity costs exit, they can be conveniently represented by fixed costs. Opportunity costs are endogenized by linking them to current efficiency. The effect of this interchangeability of skills is studied in the context of the effect of entry on firm selection in a Cournot setting. It is found that inefficient firms are more likely to crowd out efficient ones when the relationship between current efficiency and opportunity costs is strong, and when the fixed costs of changing markets are high. Moreover, in the long run firms with intermediate cost levels are likely to induce the exit of low and high cost firms. Coûts d'opportunité, concurrence et survie des entreprises. La présente étude remet en question l'hypothèse économique courante voulant que les agents économiques en situation de concurrence aient des niveaux d'utilité de réserve identiques, et que lorsque des différences dans les coûts d'opportunité existent, elles puissent être incorporées dans les coûts fixes. Les coûts d'opportunité sont endogénisés en les reliant au niveau d'efficacité dans l'activité courante. On examine l'effet de cette interchangeabilité des qualifications dans une industrie en concurrence à la Cournot avec entrée potentielle. On montre que les firmes inefficaces ont tendance à remplacer les firmes efficaces lorsque la corrélation entre l'efficacité courante et les coûts d'opportunité est élevée, et lorsque les coûts fixes de changer d'industrie sont élevés. De plus, à long terme les firmes ayant des coûts intermédiaires induisent la sortie des firmes ayant des coûts très bas ou très élevés.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-74.

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Date of creation: 01 Jul 2002
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Handle: RePEc:cir:cirwor:2002s-74

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Keywords: Entry; Exit; Efficiency; Firm selection; Entrée; Sortie; Efficacité; Survie des entreprises;

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  1. Dierickx, I. & Matutes, C. & Neven, D., 1991. "Cost differences and survival in declining industries : A case for 'picking winners'?," European Economic Review, Elsevier, vol. 35(8), pages 1507-1528, December.
  2. Reynolds, Stanley S, 1988. "Plant Closings and Exit Behaviour in Declining Industries," Economica, London School of Economics and Political Science, vol. 55(220), pages 493-503, November.
  3. Gromb, Denis & Ponssard, Jean-Pierre & Sevy, David, 1997. "Selection in Dynamic Entry Games," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 62-84, October.
  4. Baden-Fuller, Charles W F, 1989. "Exit from Declining Industries and the Case of Steel Castings," Economic Journal, Royal Economic Society, vol. 99(398), pages 949-61, December.
  5. Vettas, Nikolaos, 2000. "On entry, exit, and coordination with mixed strategies," European Economic Review, Elsevier, vol. 44(8), pages 1557-1576, August.
  6. Garella, P-G & Richelle, Y, 1997. "Exit, Sunk Costs and the Selection of Firms," ASSET - Instituto De Economia Publica 154, ASSET (Association of Southern European Economic Theorists).
  7. Lippman, Steven A & McCardle, Kevin F & Rumelt, Richard P, 1991. "Heterogeneity under Competition," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 774-82, October.
  8. Ghemawat, Pankaj & Nalebuff, Barry, 1990. "The Devolution of Declining Industries," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 167-86, February.
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