The competitive effects of declining entry costs over time: Evidence from the static random access memory market

• Published in: International journal of industrial organization Vol. 80; p. 102797
• Main Authors: Liu, An-Hsiang, Siebert, Ralph B.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2022
• Subjects: Dynamic efficiency gains; Entry costs; Entry protection; Entry regulation; Market entry; Market structure; Semiconductor industry; Social planner; Subsidies; Taxes; Market entry; Market structure; O3; Entry regulation; L1; L6; C1; Taxes; Dynamic efficiency gains; Entry protection; Entry costs; Subsidies; Semiconductor industry; Social planner
• ISSN: 0167-7187
• DOI: 10.1016/j.ijindorg.2021.102797

•We focus on the estimation of market entry costs that are declining over time and evaluate their impact on competition and market performance.•Our estimation results show strongly declining entry costs over time.•We find that declining entry costs can lead to excessive entry costs that result from too early entries by firms.•With declining entry costs over time, entry regulation and tax policies reduce consumer welfare and they can increase producer and total surplus.•With constant entry costs over time, we find that entry regulation reduces consumer, producer, and total welfare. We focus on the estimation of market entry costs that are declining over time and evaluate their impact on competition and market performance. We employ a dynamic oligopoly model in which firms make entry, exit, and production decisions in the presence of declining entry costs and learning by doing effects. Focusing on the static random access memory industry, we show that entry costs decline drastically by approximately 2 percent or $40 million per quarter. We conduct a simulation exercise in which a social planner can protect an incumbent from subsequent entrants for different lengths of time. Based on declining entry costs over time, our results show that entry regulation can increase producer and total surplus since regulation can prevent firms from entering too early at overly high entry costs. If own learning and spillover learning are eliminated, total welfare gains are realized already for short lengths of entry protection. We also show that tax (subsidy) policies of entry costs have positive (negative) effects on total surplus while reducing (improving) consumer welfare. Finally, once we assume constant entry costs over time, we find that entry regulation reduces consumer, producer, and total welfare.