Empirical Observations on Entry
and Entry Dynamics

Dunne, Roberts, and Samuelson study of
manufacturing industries from 1963-1988:
– 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?

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

With simultaneous entry, inability to
coordinate can result in too much (or
too little) entry.
– Over time, however, market should reach
equilibrium.

With sequential entry, should not have
this problem.
– But how do firms signal their intentions?
Possible Explanations for
Frequency of Entrant Failure



Profit opportunities are brief. Failures
are actually “hit and run” entries.
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.
People and companies make mistakes.
They may overestimate themselves
and/or underestimate rivals.
Why might entrants make
mistakes?

Uncertainty about demand.
– Initial market size.
– Growth in demand over time.
• Dissemination of information (word of mouth).
• Uncertainty over product quality decreases.
• Network externalities.

Uncertainty about firm-specific factors.
– Efficiency/cost.
– Product quality.
Learning will result in
Simultaneous Entry & Exit


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Firms may not initially know about their
relative position in the market,but they
learn over time.
Inefficient firms leave market.
New firms continue to enter.
Over time, industry on average will
become more and more efficient,
“survival of the fittest”.
Stages of Industry Evolution




Klepper and Grady study, data on variety of
industries from product introduction to 1981.
Three phases:
– Growth: number of firms steadily growing
– Shakeout: number of firms steadily
declining
– Mature: number of firms has stabilized.
Many industries have long growth phases,
average is 29 years.
Shakeout is intense, on average net
decrease of 52% of firms