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

Abstract

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.