Firm Turnover in Imperfectly Competitive Markets

Preprint
Publisher Website
Google Scholar
  • 1 January 2003
    • preprint
      • Published in RePEc
Abstract
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.
All Related Versions

This publication has 0 references indexed in Scilit: