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Firm Turnover in Imperfectly Competitive Markets

  • Marcus Asplund

    ()

    (Department of Economics, Columbia University)

  • Volker Nocke

    ()

    (Department of Economics, University of Pennsylvania)

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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File URL: http://economics.sas.upenn.edu/system/files/working-papers/03-010.pdf
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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
Date of revision:
Handle: RePEc:pen:papers:03-010
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  11. Gschwandtner, Adelina & Lambson, Val E., 2002. "The effects of sunk costs on entry and exit: evidence from 36 countries," Economics Letters, Elsevier, vol. 77(1), pages 109-115, September.
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  18. Asplund, Björn Marcus & Nocke, Volker, 2000. "Imperfect Competition, Market Size and Firm Turnover," CEPR Discussion Papers 2625, C.E.P.R. Discussion Papers.
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