Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price
39 Pages Posted: 21 Mar 2006
Date Written: December 2005
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: Suggested Citation