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Firm Turnover in Imperfectly Competitive Markets

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Author Info
Marcus Asplund () (Department of Economics, Columbia University)
Volker Nocke () (Department of Economics, University of Pennsylvania)

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Abstract

This paper is motivated by the empirical regularity that industries differ greatly in the level of firm turnover, and that entry and exit rates are positively correlated across industries. Our objective is to investigate the effect of sunk costs and, in particular, market size on entry and exit rates, and hence on the age distribution of firms. We analyze a stochastic dynamic model of a monopolistically competitive industry. Each firm’s efficiency is assumed to follow a Markov process. We show existence and uniqueness of a stationary equilibrium with simultaneous entry and exit: efficient firms survive while inefficient ones leave the market and are replaced by new entrants. We perform comparative dynamics with respect to the level of sunk costs: entry costs are negatively and fixed production costs positively related to entry and exit rates. A central empirical prediction of the model is that the level of firm turnover is increasing in market size.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 03-010.

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Length: 44 pages
Date of creation: 07 Apr 2003
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Handle: RePEc:pen:papers:03-010

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Related research
Keywords: firm turnover monopolistic competition industry dynamics entry exit market size firm age distribution

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Find related papers by JEL classification:
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
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marc J. Melitz & Gianmarco I.P. Ottaviano, . "Market Size, Trade, and Productivity," Development Working Papers 201, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
    Other versions:
  2. Leora Klapper & Luc Laeven & Raghuram Rajan, 2004. "Business Environment and Firm Entry: Evidence from International Data," NBER Working Papers 10380, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," NBER Working Papers 10501, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Arnab Bhattacharjee, 2005. "Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence using Hazard Regression Models," Econometrics 0503021, EconWPA. [Downloadable!]
    Other versions:
  5. Chad Syverson, 2006. "Prices, Spatial Competition, and Heterogenous Producers: An Empirical Test," NBER Working Papers 12231, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Hajime Tomura, 2007. "Firms Dynamics, Bankruptcy Laws and Total Factor Productivity," Working Papers 07-17, Bank of Canada. [Downloadable!]
  7. Massimo Del Gatto & Giordano Mion & Gianmarco I.P. Ottaviano, 2007. "Trade Integration, Firm Selection and the Costs of Non-Europe," Working Paper CRENoS 200703, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
    Other versions:
  8. Ronald Jarmin & Shawn Klimek & Javier Miranda, 2005. "The Role of Retail Chains: National, Regional, and Industry Results," Working Papers 05-30, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  9. Tibor Besedes & Thomas J. Prusa, 2003. "On the Duration of Trade," NBER Working Papers 9936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Chad Syverson, 2003. "Product Substitutability and Productivity Dispersion," NBER Working Papers 10049, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Volker Nocke & Stephen Yeaple, 2004. "Mergers and the Composition of International Commerce," NBER Working Papers 10405, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. James Bergin & Dan Bernhardt, 2006. "Industry Dynamics with Stochastic Demand," Working Papers 1043, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
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