William F. Chappell

A Poisson Probability Model of Entry and Market Structure with an Application to U. S. Industries during 1972-77

The performance characteristics of an industry are closely linked to the nature of entry and exit in the industry. If entry barriers are low, the threat of potential entry can effectively constrain the ability of incumbent firms to raise price above the competitive level. On the other hand, as entry barriers rise and the probability of entry diminishes, the potential for monopolistic practices increases. Prior empirical studies of entry have focused mainly on its determinants, emphasizing industry characteristics as entry barriers. Examples include McGuckin [19], Orr [21], McDonald [17], and Duetsch [7], which analyze the number of new entrants, and Berry [4], McDonald [17; 18], and Masson and Shannon [15; 16] which focus on the market share of entering firms. Our study uses the model of Orr, and its later extension by Duetsch, as its initial reference point. Like the Orr-Duetsch studies we estimate a model for entry determinants across industries based on the number of new firms. Our contribution is two-fold. First, we analyze a new sample period, 1972-77. Second, we provide a methodological improvement over the logarithmic regression approaches of Orr and Duestch. Because the observations on entry are count data (non-negative integers), our model is developed from the premise that entry requires a statistical framework based on a discrete probability distribution. To meet this requirement, we specify and estimate an econometric model of entry based on the Poisson distribution. Our methodology is in the spirit of Hausman, Hall, and Griliches [11] who apply the Poisson distribution to count data on patent application across firms. Hausman, Hall and Griliches point out that the Poisson model offers an improved methodology for a wide range of economic applications that feature data in the form of repeated counts. This observation motivated our application of the Poisson distribution to the entry problem. The Poisson approach admits a richer analysis of the entry data than the logarithmic regression approach in two ways. First, the logarithmic specification, while computationally convenient, provides a rather incomplete description of the entry data. The log of entry is only well defined

Demand fluctuations and firm heterogeneity

This paper reports evidence supporting the hypothesis that production flexibility is one of the forces that explain differences in the distribution of firm sizes across industries. Using a data set composed of annual observations on 163 four-digit manufacturing industries over the period 1978-88, the authors find a negative relationship between market share and sales variability. This empirical result suggests that large and small fir ms each have their own efficiency niches. While large firms enjoy the advantage of static production efficiency, the flexible production technologies of small firms enable them to respond better to changin g demand conditions. Copyright 1993 by Blackwell Publishing Ltd.

Advertising, competition and market share instability

Advertising can promote market power by differentiating products, by establishing brand loyalty among consumers, and by raising the costs of entry. On the other hand, advertising can be a source of valuable information to consumers that leads to an erosion in the market shares of individual sellers. The empirical relationship between advertising and market share instability across industries sheds light on the competitive implications of advertising and promotional activities. Prior tests of this relationship rely on market share observations from the Census of Manufactures that are reported only every five years. The present study, by contrast, employs a data set consisting of annual market share observations for 163 four-digit manufacturing industries over the period 1978–88. The empirical results show a positive and statistically significant ceteris paribus relationship between advertising intensity and market share instability, thereby lending support to the hypothesis that advertising is generally pr...

The impact of unionization on the entry of firms: Evidence from U.S. industries

Traditional models of entry-deterrence typically emphasize sunk costs or predatory pricing, but unionization might also discourage potential entrants. This paper explores this possibility through an empirical model of entry that includes unionization as an explanatory variable. We find that unionization has a statistically significant entry-deterring effect.

Union rents and market structure revisited

Several recent studies give conflicting evidence on whether market power associated with industry concentration is an important source of union rents. Using a 1977 sample of 327 four-digit manufacturing industries, we re-examine the issue with a regression analysis that allows for differential union effects on price-cost margins across three levels of concentration. Large and small firm as well as industry average price-cost margins are analyzed. The results reaffirm those of Hirsch and Connolly (1987), who conclude that the effect of unions on profits is independent of market structure, and thus market power is not an important source of union rents. We find that unionization: (1) reduces industry profits in all three concentration groups with statistically insignificant differential effects, and (2) has a greater negative effect on the profits of large firms than it does on the profits of small firms, regardless of the concentration category.

Market Structure, Sales to Government, and the Theory of Oligopoly

Abstract This paper examines the relationship between industry profitability, sales to government, market structure, and firm size. The empirical results consistently show that government purchases of goods and services from the private sector significantly raise the profits of small firms across all industries, but that there is no significant relationship between large firm profitability and sales to government, even in highly concentrated industries. It is concluded that sales to government do not appear to facilitate collusion among large firms. Instead, the main impact of government purchases is to transfer wealth from the general taxpayer to small business. The problem implicitly raised by these remarks is why all sales to the government are not at collusive prices. Part of the answer is that the government is usually not a sufficiently large buyer of a commodity to remunerate the costs of collusion [Stigler (1968, p. 45)].

The Competitive Role of Import Penetration

The United States has run ever-increasing record trade deficits in the 1980s. For example, the 1984 deficit of

Determinants of Entry and Exit: An Application of the Compounded Bivariate Poisson Distribution to U. S. Industries, 1972-1977

123.3 billion was almost twice the 1983 level. Most of the growth, some 92%, is accounted for by the manufacturing sector of the economy, which is the traditional focus of industrial organization research. While the deficits rate of growth has fallen recently, 1987s deficit of

Sources of Concentration-Related Profits

171 billion is still considered to reflect a fundamental problem by some policy makers. 1