Endogenous shakeouts Bertomeu, Jeremy

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Bertomeu, Jeremy
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International Journal of Industrial Organization
Business, international; Analysis; Business
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.ijindorg.2008.11.006 Byline: Jeremy Bertomeu Keywords: Shake-out; Sunk cost; Strategic uncertainty; Coordination Abstract: Most new industries feature a shakeout, i.e. a short burst of entry soon followed by rapid exit of most early entrants. Yet, the speed, magnitude and timing of shakeouts are somewhat puzzling from the perspective of conventional entry models. In this paper, we argue that shakeouts are likely to occur as a result of the stochastic dynamics of the entry process, when firms are uncertain about their competitors' decision to enter. We show that the magnitude of such "endogenous" shakeouts can be quite large and sudden, in particular in highly competitive industries or markets with low-investment cost, low impatience and high liquidation values. Author Affiliation: Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, United States Article History: Received 21 January 2007; Revised 11 November 2008; Accepted 19 November 2008 Article Note: (footnote) [star] Many thanks to Esther Gal-Or for helpful advice, Steve Spear for continuous support as well as Jose Plehn-Dujowich, Francisco Ruiz-Aliseda and seminar participants at IIOC Boston. I am very grateful to Steve Klepper for sharing some data on entry and exit in various industries as well as Carl Shapiro for bibliographic assistance. This research was supported by a grant from the William Larimer Mellon fellowship.
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