Firm Entry Diversity, Resource Space Heterogeneity and Market Structure

César García-DíazManagement Department, University of Antwerp (Belgium)

Industrial Engineering Department, Universidad de los Andes (Colombia)

Arjen van WitteloostuijnManagement Department, University of Antwerp (Belgium)

Artificial Economics 2011, The Hague, Sept. 1-2, 2011

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Agenda

• Theoretical background• Research questions• The model• Findings• Conclusions

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Theoretical background

Success in founding attempts

Founding attempts

Market structure (concentration +

density)

Population founding

Organizational mortality

*Adapted from Carroll & Kessina (2005).

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Success in founding attempts

Founding attempts

Market structure (concentration +

density)

Population founding

Organizational mortality

Theoretical background

“Second selection process”

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Theoretical background

Success in founding attempts

Founding attempts

Market structure (concentration +

density)

Population founding

Organizational mortality

“First selection process”

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Theoretical background

• Diversifying (de alio) firms have significantly lower mortality rates than new start-ups (de novo firms) in many industries (Carroll and Khesina 2005).

• Diversifying entrants outcompete new start-ups in turbulent environments, but such an outcome is reversed when new start-ups have strong learning capacities (Ganco and Agarwal 2009).

• “For selection processes to be meaningful, organizations must exhibit stable sources of heterogeneity. Organizational adaptation may contribute to these stable sources of organizational level differences that, in turn, form the basis of differential selection” (Levinthal 1997: 934).

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Research questions

• What is the effect of both consumer heterogeneity and firm entry variation on market structure?

• How do selection-based results depend on the available heterogeneity at the source (entry diversity)?

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The model – The resource space

NkbCBP

bCBPN

iiti

ktktk ,...,2,1,

)1(

)1(

11,

1,,

Prob. of entering at position k

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The model –Firm behavior Production costs

)(),( tVWFWtQC iViFiiPROD

)()( tVAFtQ iii

)()(..

)(min

tVAFtQas

tC

iii

iPROD

Niche-width costs

)()()( twtwNWCtC li

ui

iNW Large-scale firm Small-scale firm

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The model – Firm entry

• Density dependence model (Carroll and Hannan 2000). Number of entrants is drawn from a negative binomial distribution with probability O/(O+lambda); O = “overdispersion” parameter = 2 (Lee and Harrison 2001).

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The model - Dynamics

• Density dependence model parameters are adjusted following Lee and Harrison (2001).

• Firms may expand vertically and horizontally using similar rules to set prices. Firms check values of incremental profits and expand in the most attractive direction. Niche centres are updated accordingly.

• Firms leave the market when reaching negative cumulative profits.

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The model – Price setting

)1(

minmin

,,

,

*, N

kncP

SiU

SiU

iti

ttk

itk

tktk

}/)()1(,)1(

min{ max* QQC

N

kncPP

iti

t

Minimum cost

Firm’s price

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The model – Firm entry diversity

jiji

jiij ppddiversity,

• Variable d represents the distance (disparity) between two different Q efficient quantity points (at the LRAC); p’s represent their proportions in a beta distribution. The lower the beta, the higher the diversity.

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Findings

Property 1: Tailed spaces give conditions for resource-partitioning outcomesonly when entry diversity is high (density-dependent entry).

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Findings

Resource partitioning: high concentration – high density (constant entry rate)

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Findings

Property 2: Low entry diversity coupled with highly heterogeneous resourcespaces generated a market shakeout characterized by an increasing number of firmsthat first reaches a peak, to be followed by a sharp decline.

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Findings

Property 3: Rectangular spaces generate fragmented market structures composedof small firms under high entry diversity, and homogeneous markets withmedium-sized similar firms under low entry diversity.

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Findings

Property 4: The rate of market concentration change increases as entry diversitydecreases.

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Example – entrepreneurial inertia

*Ruef (2006)

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Findings

Property 5: In tailed resource spaces, the dominance of the largest-scale firms atthe market center is weakened as entry diversity increases. In all cases, most firms atthe center have a larger scale than most survivors at the periphery, but proliferationof small-sized firms is only observed under high entry diversity.

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Thank you!