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Entry and exit in the United States food and tobacco manufacturing industries
Abstract
Firm entry and exit in the U.S. food and tobacco manufacturing industries were examined over the time period of 1972 to 1982. Net exit was much more common than net entry across the 50 industries that comprise food and tobacco manufacturing. Overall, the sector has experienced a steady decline in the number of companies, from 23,529 in 1972 to 16,362 in 1987. A three-equation recursive model was constructed from theory and previous industrial organization studies that links market performance to market structure. Barriers to entry effect profitability, and profitability in turn affects entry and exit. Then changes in factors such as minimum efficient size (MES) and diversification, as well as entry and exit, influence future market concentration. The first equation linked the industry's price-cost margin (PCM) to standard structural variables such as market concentration and measures of barriers to entry. The estimated industry PCM was then used to explain entry or exit, measured by the percent change in the number of firms in the industry, over a five year census period. Tests for structural change from 1972-1977 period to the 1977-1982 period allowed pooling the data. However, similar tests for industries experiencing entry as opposed to those experiencing exit showed that one must estimate separate effects for entry and exit. Entry was most effected by predicted PCMs, capital-to-output ratios, advertising-to-sales ratios and industry growth. Exit was most effected by capital-to-output ratios and industry growth. Multicollinearity between MES and market concentration forced a refinement to the model by adjusting concentration by the industry's price elasticity of demand. The last equation of the system allowed for concentration to adjust to a new level as firm entry and exit exerted their effects along with changes in other market structure variables. The predicted entry/exit variable along with changes in MES and diversification were significantly related to concentration change. We also found evidence that suggests entry and exit of small firms are different from those of large firms. Entry and exit of small firms seem more affected by barriers to entry and exit than entry and exit of large firms.
Subject Area
Marketing|Agricultural economics|Economics
Recommended Citation
Qiu, Yiguang, "Entry and exit in the United States food and tobacco manufacturing industries" (1993). Doctoral Dissertations Available from Proquest. AAI9316709.
https://scholarworks.umass.edu/dissertations/AAI9316709