Producers entering a market can differ widely in their prior production experience, ranging from none to extensive experience in related geographic or product markets. In this paper, we quantify the nature of prior plant and firm experience for entrants into a market and measure its effect on the plant's decision to exit the market. Using plant-level data for seven regional manufacturing industries in the U.S., we find that a producer's experience at the time it enters a market plays an important role in the subsequent exit decision, affecting both the overall probability of exit and the method of exit. After controlling for observable plant and market profit determinants, there remain systematic differences in failure patterns across three groups of plants distinguished by their prior experience: de novo entrants, experienced plants that enter by diversifying their product mix, and new plants owned by experienced firms. The results indicate that the exit decision cannot be treated as determined solely by current and future plant, firm, and market conditions, but that the plant's history plays an important independent role in conditioning the likelihood of survival.
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Costs, Demand, and Imperfect Competition as Determinants of Plant_level Output Prices
June 1992
Working Paper Number:
CES-92-05
The empirical modeling of imperfectly competitive markets has been constrained by the difficulty of obtaining micro data on individual producer prices, outputs, and costs. In this paper we utilize micro data collected from the 1977 Census of Manufactures to study the determinants of plant-level output prices among U.S. bread producers. A theoretical model of short-run price competition among plants producing differentiated products is used to specify reduced-form equations for each plant's price and output. Estimates of the reduced-form equations indicate that the main determinants of both the plant's output level and output price are the plant's own cost variables, particularly its capital stock and the prices of material inputs. The number of rival producers faced by the plant, the production costs of these rivals, and the demand conditions faced by the plant play no role in price or output determination. The results are not consistent with either oligopolistic competition or monopoly behavior, but rather are consistent with price-taking behavior by individual producers combined with output quality differentials across producers.
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Prices, Spatial Competition, and Heterogeneous Producers: An Empirical Test
August 2004
Working Paper Number:
CES-04-16
In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers' greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. ready-mixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers are low-cost because they are more efficient.
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The Going Public Decision and the Product Market
July 2008
Working Paper Number:
CES-08-20
At what point in a firm's life should it go public? How do a firm's ex ante product market characteristics relate to its going public decision? Further, what are the implications of a firm going public on its post-IPO operating and product market performance? In this paper, we answer the above questions by conducting the first large sample study of the going public decisions of U.S. firms in the literature. We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms. Our findings can be summarized as follows. First, a private firm's product market characteristics (market share, competition, capital intensity, cash flow riskiness) significantly affect its likelihood of going public. Second, private firms facing less information asymmetry and those with projects that are cheaper for outsiders to evaluate are more likely to go public (consistent with Chemmanur and Fulghieri (1999)). Third, IPOs of firms occur at the peak of their productivity cycle (consistent with Clementi (2002)): the dynamics of total factor productivity (TFP) and sales growth exhibit an inverted U-shaped pattern. Finally, sales, capital expenditures, and other performance variables exhibit a consistently increasing pattern over the years before and after the IPO. The last two findings are consistent with the widely documented post-IPO operating underperformance of firms being due to the real investment effects of a firm going public, and inconsistent with underperformance being solely due to earnings management immediately prior to the IPO.
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The Effects of Productvity and Demand-Specific Factors on Plant Survival and Ownership Change in the U.S. Poultry Industry
July 2015
Working Paper Number:
CES-15-20
In this paper we study the productivity-survival link in the U.S. poultry processing industry using the longitudinal data constructed from five Censuses of Manufactures between 1987 and 2007. First, we study the effects of physical productivity and demand-specific factors on plant survival and ownership change. Second, we analyze the determinants of the firm-level expansion. The results show that higher demand-specific factors decrease the probability of exit and increase the probability of ownership change. The effect of physical productivity on the probability of exit or ownership change is generally insignificant. Also, firms with higher demand-specific factors have higher probability to expand whereas the average firm-level physical productivity turns out to be an insignificant determinant of firm expansion.
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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices
December 2008
Working Paper Number:
CES-08-41
This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready-mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency-based mechanism. Namely, higher productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and charge lower prices. We find evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms' vertical structures per se: non-vertical firms with large local concrete operations have similarly high productivity levels.
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The Slow Growth of New Plants: Learning about Demand?
March 2012
Working Paper Number:
CES-12-06
It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants' idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer base). We find active accumulation driven by plants' past production decisions quantitatively dominates passive demand accumulation, and that within-firm spillovers affect demand levels but not growth.
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Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices
July 2006
Working Paper Number:
CES-06-21
This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich data set on producers in the cement and ready-mixed concrete industries over a 34- year period to perform a detailed case study. There is little evidence that foreclosure effects are quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. We suggest an alternative mechanism that is consistent with these patterns and provide additional evidence in support of it: namely, that higher productivity producers are more likely to vertically integrate, and as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We explore possible sources of vertically integrated producers' productivity advantage and find that the advantage is tied to firm size, possibly in part through improved logistics coordination, but not to several other possible explanations.
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Mergers and Acquisitions, Employment, Wages and Plant Closures in the U.S. Meat Product Industries: Evidence from Micro Data
March 2007
Working Paper Number:
CES-07-08
The purpose of this paper is to evaluate the impact of mergers and acquisitions (M&As) on wages and employment and plant closures in the meat packing, prepared meat products, and poultry slaughter and processing industries over 1977-87 and 1982-92. The analysis relies on a balanced panel dataset of all plants owned by meat and poultry firms that existed over 1977-87 or 1982-92. We find that (1) M&As are positively associated with wages in the meat packing and prepared meat products industries over 1977-87, but not over 1982-92; (2) changes in employment are positively related to M&As in all three meat and poultry industries over 1977-87, but only in the poultry industry over 1982-92; and (3) M&As are negatively associated with plant closures.
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Output Price And Markup Dispersion In Micro Data: The Roles Of Producer And Heterogeneity And Noise
August 1997
Working Paper Number:
CES-97-10
This paper provides empirical evidence on the extent of producer heterogeneity in the output market by analyzing output price and price-marginal cost markups at the plant level for thirteen homogeneous manufactured goods. It relies on micro data from the U.S. Census of Manufactures over the 1963-1987 period. The amount of price heterogeneity varies substantially across products. Over time, plant transition patterns indicate more persistence in the pricing of individual plants than would be generated by purely random movements. High-price and low-price plants remain in the same part of the price distribution with high frequency, suggesting that underlying time-invariant structural factors contribute to the price dispersion. For all but two products, large producers have lower output prices. Marginal cost and the markups are estimated for each plant. The markup remains unchanged or increases with plant size for all but four of the products and declining marginal costs play an important role in generating this pattern. The lower production costs for large producers are, at least partially, passed on to purchasers as lower output prices. Plants with the highest and lowest markups tend to remain so over time, although overall the persistence in markups is less than for output price, suggesting a larger role for idiosyncratic shocks in generating markup variation.
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The Dynamics of Market Structure and Market Size in Two Health Services Industries
October 2007
Working Paper Number:
CES-07-26
The relationship between the size of a market and the competitiveness of the market has been of long-standing interest to IO economists. Empirical studies have used the relationship between the size of the geographic market and both the number of firms in the market and the average sales of the firms to draw inferences about the degree of competition in the market. This paper extends this framework to incorporate the analysis of entry and exit flows. A key implication of recent entry and exit models is that current market structure will likely depend upon history of past participation. The paper explores these issues empirically by examining producer dynamics for two health service industries, dentistry and chiropractic services. We find that the number of potential entrants and past number of incumbent firms are correlated with current market structure. The empirical results also show that as market size increases the number of firms rises less than proportionately, firm size increases, and average productivity increases. However, the magnitude of the correlations are sensitive to the inclusion of the market history variables.
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