- Marcus Asplund
- Volker Nocke
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 fixed costs and, in particular, market size on entry and exit rates and hence on the age distribution of firms.We analyse 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 fixed costs: entry costs are negatively related 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. In larger markets, competition is endogenously more intense than in smaller markets, and so price-cost margins are smaller. This price competition effect implies that the marginal surviving firm has to be more efficient than in smaller markets. Hence, in larger markets, the expected lifespan of firms is shorter, and the age distribution of firms is first-order stochastically dominated by that in smaller markets.In the empirical part, the prediction on market size and firm turnover is tested on an industry where firms compete in well-defined geographical markets of different sizes. Using data on hair salons in Sweden, we show that an increase in market size or fixed costs shifts the age distribution of firms towards younger firms, as predicted by the model. Copyright 2006, Wiley-Blackwell.
Marcus Asplund & Volker Nocke, 2006.
"Firm Turnover in Imperfectly Competitive Markets -super-1,"
Review of Economic Studies, Oxford University Press, vol. 73(2), pages 295-327.
Download full text from publisher
As the access to this document is restricted, you may want to search for a different version of it.
All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:73:y:2006:i:2:p:295-327. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://academic.oup.com/restud .
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
We have no bibliographic references for this item. You can help adding them by using this form .
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/restud .
Please note that corrections may take a couple of weeks to filter through
the various RePEc services.