Entry Barriers and the Growth of Firms

Abstract

Among firms beyond a minimum efficient size, rate of growth is generally unrelated to firm size [4; 5; 10; 21]. Nevertheless, stochastic models that assume firm size and rate of growth are completely unrelated have had only limited success in predicting the size distribution of firms [15]. So perhaps in special circumstances firm size can affect growth. Our purpose is to identify growth incentives that can plausibly be argued to exist only when barriers to entry are very high, and then test for the effect of these incentives by contrasting samples of firms operating under different entry conditions. Our results indicate that firm size can affect rate of growth more when new entry is barred. In examining capacity expansion incentives for the firm in an industry when entry is barred we assume homogeneous product, and we assume that price competition is ineffective due to some form of price leadership, or to tacit cooperation at an entry preventing price [1; 11; 25]. We also assume Cournot-like capacity adjustment behavior on the part of individuals firms. We find on these assumptions that relative size and technology influence expansion incentives when entry is barred. In particular, a firm may independently refrain from expansion even though price is above long-run marginal cost. On specifying the model and estimating its parameters, we find differences between parameter estimates for 21 firms in industries with very high entry