This paper analyzes how entrepreneurs fare in an intermediary market segment when the segment is closely attached to a single supplier market. While focusing on two structural constraints, organizational structure and competitive pressure, I build off of the fact that in the past thirty years in the U.S. beer industry, as the number of beer producers (i.e. brewers) proliferated, their intermediaries (i.e. wholesalers) declined. Using establishment-level restricted-access economic microdata from the Longitudinal Business Database, I examine what happens with intermediaries when (some) producers start competing on product variety instead of competing on scale. Piecewise exponential survival models show that Stinchcombe's 'liability of newness' principle can get suspended and certain newcomers have better survival chances than industry incumbents. I call this effect the potential of newness under which entrepreneurial establishments fare better if they are part of well-resourced multiunit firms. Furthermore, I show that these resource-rich entrepreneurs benefit from the potential of newness especially in areas with competition-laden history and where the industry experiences shakeouts. For market incumbents, the more competition-laden the history of the local market, the higher the hazards of current time establishment failure. For multiunit entrepreneurs, however, a more competition-laden history of the local market is associated with a decrease in the hazards of current time establishment failure. This paper highlights that market structure not only enables but sometimes traps already existing organizations and make them less adaptive to changing logics of competition. The results highlight how organizational factors and geography create inequalities among intermediary organizations.
-
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.
View Full
Paper PDF
-
Locally Owned Bank Commuting Zone Concentration and Employer Start-Ups in Metropolitan, Micropolitan and Non-Core Rural Commuting Zones from 1970-2010
August 2018
Working Paper Number:
CES-18-34
Access to financial capital is vital for the sustainability of the local business sector in metropolitan and nonmetropolitan communities. Recent research on the restructuring of the financial industry from local owned banks to interstate conglomerates has raised questions about the impact on rural economies. In this paper, we begin our exploration of the Market Concentration Hypothesis and the Local Bank Hypothesis. The former proposes that there is a negative relationship between the percent of banks that are locally owned in the local economy and the rate of business births and continuations, and a positive effect on business deaths, while that latter proposes that there is a positive relationship between the percent of banks that are locally owned in the local economy and the rate of business births and continuations, and a negative effect on business deaths. To examine these hypotheses, we examine the impact of bank ownership concentration (percent of banks that are locally owned in a commuting zone) on business establishment births and deaths in metropolitan, micropolitan and non-core rural commuting zones. We employ panel regression models for the 1980-2010 time frame, demonstrating robustness to several specifications and spatial spillover effects. We find that local bank concentration is positively related to business dynamism in rural commuting zones, providing support to the importance of relational lending in rural areas, while finding support for the importance of market concentration in urban areas. The implications of this research are important for rural sociology, regional economics, and finance.
View Full
Paper PDF
-
Entry, Exit, and the Determinants of Market Structure
September 2009
Working Paper Number:
CES-09-23
Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.
View Full
Paper PDF
-
Talent Recruitment and Firm Performance: The Business of Major League Sports
November 2013
Working Paper Number:
CES-13-54R
Firms rely heavily on their investments in human capital to achieve profits. This research takes advantage of detailed information on worker performance and confidential information on firm revenue and operating costs to investigate the relationship between talent migration and firm profitability in major league sports. One key problem that firms have is identifying performance measures for its workforce, especially for potential employees (recruits). In contrast to nearly all other industries, in the industry of professional team sports, detailed information about the past performance of each individual worker (athlete) is known to all potential employers. First, I demonstrate using public data that worker (athlete) statistics aggregated to the establishment (team) level correlate with success on the field (measured in win percentage). Second, I use confidential data from the 2007 Economic Censuses, and from the 2007 and 2008 Service Annual Surveys to investigate the link between individual worker performance and team profitability, controlling for many other aspects of the sports business, specifically taking account of the mobility of athletic 'stars' and 'superstars' from one team to another. The investigations in this paper provide support for the hypothesis that hiring talented individuals (stars) will increase a firm's profit. However, there is not convincing support for the incremental benefit of hiring superstars. The mixed evidence suggests a benefit on balance.
View Full
Paper PDF
-
Do Market Leaders Lead in Business Process Innovation? The Case(s) of E-Business Adoption
April 2011
Working Paper Number:
CES-11-10
This paper investigates the relationship between market position and the adoption of IT-enabled process innovations. Prior research has focused overwhelmingly on product innovation and garnered mixed empirical support. I extend the literature into the understudied area of business process innovation, developing a framework for classifying innovations based on the complexity, interdependence, and customer impact of the underlying business process. I test the framework's predictions in the context of ebuying and e-selling adoption. Leveraging detailed U.S. Census data, I find robust evidence that market leaders were significantly more likely to adopt the incremental innovation of e-buying but commensurately less likely to adopt the more radical practice of e-selling. The findings highlight the strategic significance of adjustment costs and co-invention capabilities in technology adoption, particularly as businesses grow more dependent on new technologies for their operational and competitive performance.
View Full
Paper PDF
-
Survival Patterns Among Newcomers To Franchising
May 1997
Working Paper Number:
CES-97-05
This study analyzes survival patterns among franchisee firms adn establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
View Full
Paper PDF
-
Survival Patterns Among Newcomers to Franchising
January 1997
Working Paper Number:
CES-97-01
This study analyzes survival patterns among franchisee firms and establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
View Full
Paper PDF
-
Horizontal Diversification and Vertical Contracting: Firm Scope and Asset Ownership in Taxi Fleets
May 2008
Working Paper Number:
CES-08-10
This paper considers the vertical implications of horizontal diversification. Many studies have documented organizational problems following corporate diversification. We propose that selective vertical dis-integration ' shifting asset ownership to agents ' can mitigate rent-seeking and coordination failures in the diversified firm. We test this proposition in a particularly simple setting that allows us to isolate the effects of interest and control for the likely endogeneity of diversification: taxi fleets that diversify into the limousine, or black car, segment following a wave of entry deregulation in the early 1990s. The results show that taxi fleets are substantially more likely to use owner-operator drivers following diversification. Moreover, diversified fleets that use a greater share of owner operators are more productive than diversified fleets that own most of their vehicles. We interpret these findings as evidence that firms re-organize in response to the challenges of diversification, and that there are causal links between the horizontal and vertical boundaries of the fleet.
View Full
Paper PDF
-
Diversification, Organizational Adjustment and Firm Performance: Evidence from Microdata
October 2007
Working Paper Number:
CES-07-29
This paper proposes that diversification taxes firms' existing organizational systems by altering routines, formal contract structures and strategies. I test the proposition that organizational adjustment costs associated with diversification erode incumbent competitive advantage, using novel microdata on taxicab firms from the Economic Census. The tests exploit exogenous local characteristics of taxi markets to identify the impact of diversification on firm organization and performance. Supporting the contention that diversification leads to organizational adjustments, the results show that diversifying firms are less likely to adopt computerized dispatching systems for their taxicabs and make significant changes in their formal contract structures governing asset ownership. Consistent with the theory, diversification is associated with falling taxi productivity. Comparing the productivity of diversified and focused start-ups and incumbent firms reveals that the organizational change component of diversification accounts for an 18% decrease in paid ride-miles per taxi. The results support the core contention of the paper that diversification taxes firms' existing organizational capital.
View Full
Paper PDF
-
Technological Leadership and Late Development: Evidence from Meiji Japan, 1868-1912
December 2007
Working Paper Number:
CES-07-32R
Large family-owned conglomerates known as zaibatsu have long been credited with leading Japanese industrialization during the Meiji Period (1868-1912), despite a lack of empirical analysis. Using a new dataset collected from corporate genealogies estimate of entry probabilities, I find that characteristics associated with zaibatsu increase a firm's likelihood of being an industry pioneer. In particular, first entry probabilities increase with industry diversification and private ownership, which may provide internal financing and risk-sharing, respectively. Nevertheless, the costs of excessive diversification may deter additional pioneering, which may account for the loss of zaibatsu technological leadership by the turn of the century.
View Full
Paper PDF