This paper considers an entry game in which an incumbent firm operates in a number of markets and a potential entrant seeks to enter some or all of the markets. While price discrimination has usually been thought of as a barrier to entry, in our model it is not and, on the contrary, we find that charging a uniform price across the markets actually discourages entry. Partial entry occurs when the two firms’ products are highly substitutable. In this case, a ban on price discrimination raises the profits of both the incumbent and the entrant but reduces consumer and total welfare.
{"title":"Uniform Pricing as a Barrier to Entry","authors":"Hong Feng, Youping Li, Jie Shuai","doi":"10.2139/ssrn.3070750","DOIUrl":"https://doi.org/10.2139/ssrn.3070750","url":null,"abstract":"This paper considers an entry game in which an incumbent firm operates in a number of markets and a potential entrant seeks to enter some or all of the markets. While price discrimination has usually been thought of as a barrier to entry, in our model it is not and, on the contrary, we find that charging a uniform price across the markets actually discourages entry. Partial entry occurs when the two firms’ products are highly substitutable. In this case, a ban on price discrimination raises the profits of both the incumbent and the entrant but reduces consumer and total welfare.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128931702","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit at all observed minimum wage levels, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). Looking at data from delivery orders, we find that lower rated restaurants also increase prices in response to minimum minimum wage increases. Overall, our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.
{"title":"Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit","authors":"D. Luca, Michael Luca","doi":"10.2139/ssrn.2951110","DOIUrl":"https://doi.org/10.2139/ssrn.2951110","url":null,"abstract":"We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit at all observed minimum wage levels, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). Looking at data from delivery orders, we find that lower rated restaurants also increase prices in response to minimum minimum wage increases. Overall, our analysis also highlights how digital data can be used to shed new light on labor policy and the economy.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131918555","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We identify welfare-optimal patent royalties in a model of costly imitation, entry and imperfect competition. When the social planner may impose a compulsory license, optimal royalties either blockade imitation, facilitating unregulated monopoly, or yield an aggregate-zero-profit efficient duopoly. When duopoly is optimal, the optimal per-unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even. Efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost, and may also yield higher welfare than a prize system. Interestingly, royalty payments may be negative. Because of this, efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties.
{"title":"Welfare-Optimal Patent Royalties When Imitation Is Costly","authors":"Fernando J Leiva Bertran, John L. Turner","doi":"10.2139/ssrn.1961283","DOIUrl":"https://doi.org/10.2139/ssrn.1961283","url":null,"abstract":"We identify welfare-optimal patent royalties in a model of costly imitation, entry and imperfect competition. When the social planner may impose a compulsory license, optimal royalties either blockade imitation, facilitating unregulated monopoly, or yield an aggregate-zero-profit efficient duopoly. When duopoly is optimal, the optimal per-unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even. Efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost, and may also yield higher welfare than a prize system. Interestingly, royalty payments may be negative. Because of this, efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129157088","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores role of product adding and dropping within manufacturing firms over the business cycle. While a substantial body of work has explored the importance of the extensive margins of firm entry and exit in employment and output flows, only recently has research begun to examine the adjustment across products within firms and its importance for firm and aggregate output and employment flows. Using a novel, annual firm-product data set covering all Japanese manufacturing firms with more than 4 employees from 1992 to 2006, we provide the first evidence on annual changes in product adding and dropping by continuing firms over the business cycle. We find very high rates of product adding and dropping by continuing firms between the last year of the recession and the first year of the subsequent expansion and offer an explanation and supporting evidence based on a “trapped factors” model of firm behavior.
{"title":"Product Switching and the Business Cycle","authors":"A. Bernard, Toshihiro Okubo","doi":"10.3386/W22649","DOIUrl":"https://doi.org/10.3386/W22649","url":null,"abstract":"This paper explores role of product adding and dropping within manufacturing firms over the business cycle. While a substantial body of work has explored the importance of the extensive margins of firm entry and exit in employment and output flows, only recently has research begun to examine the adjustment across products within firms and its importance for firm and aggregate output and employment flows. Using a novel, annual firm-product data set covering all Japanese manufacturing firms with more than 4 employees from 1992 to 2006, we provide the first evidence on annual changes in product adding and dropping by continuing firms over the business cycle. We find very high rates of product adding and dropping by continuing firms between the last year of the recession and the first year of the subsequent expansion and offer an explanation and supporting evidence based on a “trapped factors” model of firm behavior.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128770500","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article claims that the basic relationships between, on the one side, the small firms’ hazard of exit, and, on the other side, the GDP growth rate and the industry growth rate are U-shaped. This means that there are more births and deaths for this segment of manufacturing enterprises during both cyclical downturns and booms in the economy. Higher competition in the economy in the first case comes from necessity entrepreneurs and in the second case from opportunity ones. The article also claims that the quadratic specification would rarely be the most adequate, since other combinations of different pairs of exponents would certainly better capture nuances of the relationships being regressed, in view of the fact that the actual U-shaped relationship is rarely symmetric. This is exactly why the artificial exclusive monotonic fitting normally produces parameter estimates that signalize the existence of a decreasing relationship. So, what may wonder many people, the invariably detected inverse relationship is not caused by the second half segment (where the economic upturns occur) of the continuous of the GDP growth rate, but rather by the first (where the economic downturns occur), whose impact on the hazard of exit is normally stronger. Also, even a direct relationship may occur because of this asymmetry and findings of lack of statistical significance result from a misguided attempt to fit a linear specification to a perfect, or almost perfect, symmetrical actual U-shaped relationship. The article conclusively claims that these realizations, and the fact that authors overfit by specifying contemporaneously the GDP growth rate, the industry growth rate and the industry entry rate, explain findings in the extant literature that are awkward, unexpected and embarrassing and interpretations that are many times completely inapplicable.
{"title":"External Determinants of Small Business Survival – The Overwhelming Impact of GDP and Other Environmental Factors and a New Proposed Framework","authors":"Evaldo Guimarães Barbosa","doi":"10.2139/ssrn.2818831","DOIUrl":"https://doi.org/10.2139/ssrn.2818831","url":null,"abstract":"This article claims that the basic relationships between, on the one side, the small firms’ hazard of exit, and, on the other side, the GDP growth rate and the industry growth rate are U-shaped. This means that there are more births and deaths for this segment of manufacturing enterprises during both cyclical downturns and booms in the economy. Higher competition in the economy in the first case comes from necessity entrepreneurs and in the second case from opportunity ones. The article also claims that the quadratic specification would rarely be the most adequate, since other combinations of different pairs of exponents would certainly better capture nuances of the relationships being regressed, in view of the fact that the actual U-shaped relationship is rarely symmetric. This is exactly why the artificial exclusive monotonic fitting normally produces parameter estimates that signalize the existence of a decreasing relationship. So, what may wonder many people, the invariably detected inverse relationship is not caused by the second half segment (where the economic upturns occur) of the continuous of the GDP growth rate, but rather by the first (where the economic downturns occur), whose impact on the hazard of exit is normally stronger. Also, even a direct relationship may occur because of this asymmetry and findings of lack of statistical significance result from a misguided attempt to fit a linear specification to a perfect, or almost perfect, symmetrical actual U-shaped relationship. The article conclusively claims that these realizations, and the fact that authors overfit by specifying contemporaneously the GDP growth rate, the industry growth rate and the industry entry rate, explain findings in the extant literature that are awkward, unexpected and embarrassing and interpretations that are many times completely inapplicable.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125918020","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Entry will occur most rapidly in a market where entrants incur few or no sunk costs, do not operate at a cost disadvantage, and where consumers can easily switch from the incumbent to the entrant. The purpose of this paper is to evaluate the speed of entry in an in industry that is highly contestable, taxi rides. In recent years, firms like Uber have entered the transportation business offering a ride service that competes with the traditional yellow cab service. Uber drivers have a lower cost structure than the incumbents, sunk costs are minimal, and they are able to enter the market knowing that the incumbent’s price is sticky downwards due to municipal regulations. These industry attributes have led many an observer to comment that the rents or profits earned driving a yellow cab will quickly wither away, or stated differently, the yellow taxis have little long-term market power. Despite these favorable entry conditions, I use capital market data to show that taxi operators have been betting that market power will persist for well over fifteen years.
{"title":"Are Traditional Taxi Firms Doomed? An Answer from the Capital Market","authors":"David J. Gabel","doi":"10.2139/SSRN.2781319","DOIUrl":"https://doi.org/10.2139/SSRN.2781319","url":null,"abstract":"Entry will occur most rapidly in a market where entrants incur few or no sunk costs, do not operate at a cost disadvantage, and where consumers can easily switch from the incumbent to the entrant. The purpose of this paper is to evaluate the speed of entry in an in industry that is highly contestable, taxi rides. In recent years, firms like Uber have entered the transportation business offering a ride service that competes with the traditional yellow cab service. Uber drivers have a lower cost structure than the incumbents, sunk costs are minimal, and they are able to enter the market knowing that the incumbent’s price is sticky downwards due to municipal regulations. These industry attributes have led many an observer to comment that the rents or profits earned driving a yellow cab will quickly wither away, or stated differently, the yellow taxis have little long-term market power. Despite these favorable entry conditions, I use capital market data to show that taxi operators have been betting that market power will persist for well over fifteen years.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122105944","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although a great deal of ink has been spilled over the consequences of globalization, we do not yet fully understand the causes of increased worldwide trade. Using confidential microdata from the U.S. Census, we document widespread entry into countries abroad by U.S. firms from 1987 to 2006. We show that this extensive margin growth is unlikely to have been due to significant declines in entry costs. We instead find evidence of large roles for the development of the internet, trade agreements, and foreign income growth in driving these trends.
{"title":"The Rise of Exporting by U.S. Firms","authors":"A. McCallum, W. Lincoln","doi":"10.17016/IFDP.2016.1157","DOIUrl":"https://doi.org/10.17016/IFDP.2016.1157","url":null,"abstract":"Although a great deal of ink has been spilled over the consequences of globalization, we do not yet fully understand the causes of increased worldwide trade. Using confidential microdata from the U.S. Census, we document widespread entry into countries abroad by U.S. firms from 1987 to 2006. We show that this extensive margin growth is unlikely to have been due to significant declines in entry costs. We instead find evidence of large roles for the development of the internet, trade agreements, and foreign income growth in driving these trends.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126262737","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Industries with declining demand tend to be riddled with chronic excess capital due to the presence of a business-stealing effect and fixed costs. This article highlights the potential of mergers to internalize this business-stealing effect and thereby promote divestment. Using the case of mergers in the Japanese cement industry, it examines whether such merger-induced divestment improves total welfare based on a dynamic model of divestment. The findings suggest that merged firms indeed tended to reduce capital more actively and that, as a result of these mergers, total welfare improved despite a reduction in the consumer surplus.
{"title":"Horizontal Mergers and Divestment Dynamics in a Sunset Industry","authors":"M. Nishiwaki","doi":"10.2139/ssrn.1566367","DOIUrl":"https://doi.org/10.2139/ssrn.1566367","url":null,"abstract":"Industries with declining demand tend to be riddled with chronic excess capital due to the presence of a business-stealing effect and fixed costs. This article highlights the potential of mergers to internalize this business-stealing effect and thereby promote divestment. Using the case of mergers in the Japanese cement industry, it examines whether such merger-induced divestment improves total welfare based on a dynamic model of divestment. The findings suggest that merged firms indeed tended to reduce capital more actively and that, as a result of these mergers, total welfare improved despite a reduction in the consumer surplus.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"91 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132180401","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Money is not neutral if firm entry and exit are incorporated into a menu cost model. The real effect of money increases as a firm entry and exit rate increases, and the key is non-uniform firm distribution.
{"title":"State-Dependent Pricing, Firm Entry and Exit, and Non-Neutrality of Money","authors":"Koki Oikawa, Kōzō Ueda","doi":"10.2139/ssrn.2548853","DOIUrl":"https://doi.org/10.2139/ssrn.2548853","url":null,"abstract":"Money is not neutral if firm entry and exit are incorporated into a menu cost model. The real effect of money increases as a firm entry and exit rate increases, and the key is non-uniform firm distribution.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114710997","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates leadership positioning by U.S. firms in China using the awareness, motivation, capability (AMC) perspective. We define leadership as first in industry to invest in China, and find that leaders have characteristics associated with higher AMC, evidenced by pre-existing multinational experience, higher product market orientation, smaller scale of operations, and higher input cost structure. Notably, the motivation to lower input costs and the prior capability in multinational operations mattered only for the first wave of firms leading industry investment earlier in time, while firms with smaller scale of operations exhibited a preference to lead investment in less popular provinces. Overall, these results provide a unique view on how AMC characteristics influence international investment decisions, suggesting that firms both strategically lead and strategically follow. In additional analysis, we examine how leaders and followers positioned themselves with respect to ownership, and find that leaders were more likely to choose entry modes that offered ownership control over flexibility, consistent with internalization theories.
{"title":"Leadership Positioning among U.S. Firms Investing in China","authors":"Rossitza B. Wooster, Donna L. Paul","doi":"10.2139/ssrn.2402994","DOIUrl":"https://doi.org/10.2139/ssrn.2402994","url":null,"abstract":"This study investigates leadership positioning by U.S. firms in China using the awareness, motivation, capability (AMC) perspective. We define leadership as first in industry to invest in China, and find that leaders have characteristics associated with higher AMC, evidenced by pre-existing multinational experience, higher product market orientation, smaller scale of operations, and higher input cost structure. Notably, the motivation to lower input costs and the prior capability in multinational operations mattered only for the first wave of firms leading industry investment earlier in time, while firms with smaller scale of operations exhibited a preference to lead investment in less popular provinces. Overall, these results provide a unique view on how AMC characteristics influence international investment decisions, suggesting that firms both strategically lead and strategically follow. In additional analysis, we examine how leaders and followers positioned themselves with respect to ownership, and find that leaders were more likely to choose entry modes that offered ownership control over flexibility, consistent with internalization theories.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128469436","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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