Economics, Econometrics and Finance
4 years ago

Market competition slashes firm sizes, reshaping industries for efficiency.

RePEc: Research Papers in Economics
Sunk costs, market contestability, and the size distribution of firms
Ioannis N. Kessides, Li Tang

Paper Summary

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The size of companies in different industries can be influenced by how easy it is for new businesses to enter the market. Lower costs for new companies can lead to more competition and make it harder for inefficient companies to survive. This study looked at data from US manufacturing industries in the 1980s and 1990s and found that when market contestability is high (meaning new companies can enter easily), the range of company sizes becomes more similar. This suggests that in industries where it's easier for new companies to compete, the distribution of company sizes tends to be more balanced.