Empirical Observations on Entry and Entry Dynamics n Dunne, Roberts, and Samuelson study of manufacturing industries from : –Entry is common –Entrants are usually smaller than existing producers –The survival rate is relatively low –The rate of entry is highly correlated with the rate of exit

Where do Entrants Come From? n Dunne, Roberts, and Samuelson study finds: –New firms account for over half of all entrants and have highest exit rate –Existing firms entering new markets account for around one-third –Existing firms adding a new plant account for less than 10 percent and have lowest exit rate

Timing of Entry Decisions n With simultaneous entry, inability to coordinate can result in too much (or too little) entry. –Over time, however, market should reach equilibrium. n With sequential entry, should not have this problem. –But how do firms signal their intentions?

Possible Explanations for Frequency of Entrant Failure n Profit opportunities are brief. Failures are actually “hit and run” entries. n Entry is like a lottery ticket. Although most firms will fail, those that succeed get a very high payoff, so the expected value of entry is positive. n People and companies make mistakes. They may overestimate themselves and/or underestimate rivals.

Why might entrants make mistakes? n Uncertainty about demand. –Initial market size. –Growth in demand over time. Dissemination of information (word of mouth). Uncertainty over product quality decreases. Network externalities. n Uncertainty about firm-specific factors. –Efficiency/cost. –Product quality.

Learning will result in Simultaneous Entry & Exit n Firms may not initially know about their relative position in the market,but they learn over time. n Inefficient firms leave market. n New firms continue to enter. n Over time, industry on average will become more and more efficient, “survival of the fittest”.

Stages of Industry Evolution n Klepper and Grady study, data on variety of industries from product introduction to n Three phases: –Growth: number of firms steadily growing –Shakeout: number of firms steadily declining –Mature: number of firms has stabilized. n Many industries have long growth phases, average is 29 years. n Shakeout is intense, on average net decrease of 52% of firms