The Determinants of Entry: A Study of the Canadian Manufacturing Industries

Abstract

ENTRY plays a crucial role in microecoIJi nomic models of market structure and performance. However there has been very little direct empirical investigation of entry and its determinants over a broad cross section of industries. In this paper we construct and estimate a model which assumes entry is a function of the incentives to enter relative to the level of entry barriers. The subject of the analysis is the cross-section differences in entry between the three-digit industries of the Canadian manufacturing sector. Previous studies of entry have either concentrated on only several industries or have attempted to make conclusions about entry conditions by regressing profit rates on variables representing entry barriers. Bain (1956) examined 20 (mostly four-digit) United States manufacturing industries and concluded that the most significant barriers to entry were product differentiation, economies of scale in plant or firm and control of patents or scarce resources, respectively. Mann's study (1966), which was limited to 30 of the United States manufacturing industries, did not examine the relative importance of the various barriers to entry. Mansfield's (1962) sample was limited to four industries. Capital requirements was the only barrier he considered. Most econometric investigations of entry barriers have been indirect tests. They have regressed the profit rate, rather than entry, on those structural characteristics considered to be barriers to entry (Comanor and Wilson 1967, Miller 1969). Unfortunately this specification does not permit reliable conclusions regarding the effectiveness of these variables in deterring entry. There are theoretical reasons for questioning the often assumed strong positive relationship between entry barriers and the true profit rate. Additionally of course, there is the infamous gap between true and measured profits. This paper's treatment of entry barriers has several important advantages over previous work. Those variables considered to be entry barriers are introduced directly as determinants of entry rather than the profit rate. This is a direct rather than indirect test of the propensity of these factors to deter entrants. A most important result is that our conclusions are less sensitive to those unavoidable measurement errors in the profit rate. Our estimating equations consider a more extensive list of entry barriers over a larger (71) sample, covering all types of manufacturing.