Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price

39 Pages Posted: 21 Mar 2006

See all articles by Barry L. Bayus

Barry L. Bayus

University of North Carolina Kenan-Flagler Business School

Wooseong Kang

North Carolina State University - College of Management

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business

Date Written: December 2005

Abstract

Prior research has identified new firm entry or price declines as key factors that relate to the timing of sales takeoff in new markets. This literature considers these variables to be exogenous and finds unilateral effects. In this paper, we model new firm entry and price declines as being endogenous, and examine their simultaneous relationship in the introductory period of new markets when industry sales are negligible. Using a sample of new markets formed in the U.S. during the last 135 years, we find strong support for a simultaneous model of price and firm entry: price decreases relate to the competitive pressures associated with firm entry, and, in turn, firm entry is lower in new markets with rapidly falling prices. Furthermore, we also find that a key driver of firm entry during the early years of a new market involves the level of patent activity, and a key driver of price decreases is the presence of large firms. In contrast to the implications from existing research, our results point to the possibility that rapid price declines may delay sales takeoff in industries by dampening new firm entry.

Keywords: innovation, industry evolution, sales takeoff

JEL Classification: O30, M31, M13, L1, C31

Suggested Citation

Bayus, Barry and Kang, Wooseong and Agarwal, Rajshree, Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price (December 2005). Available at SSRN: https://ssrn.com/abstract=889321 or http://dx.doi.org/10.2139/ssrn.889321

Barry Bayus (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599
United States
919-962-3210 (Phone)

Wooseong Kang

North Carolina State University - College of Management ( email )

Campus Box 7229
Raleigh, NC 27695
United States
919-515-6953 (Phone)

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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