Firm Entry Diversity, Resource Space Heterogeneity and Market Structure

1. Firm Entry Diversity, Resource Space Heterogeneity and Market Structure César García-Díaz Management Department, University of Antwerp (Belgium) Industrial Engineering Department, Universidad de los Andes (Colombia) Arjen van Witteloostuijn Management Department, University of Antwerp (Belgium) Artificial Economics 2011, The Hague, Sept. 1-2, 2011

2. Agenda • Theoretical background • Research questions • The model • Findings • Conclusions

3. Success in founding attempts Population founding Organizational mortality Market structure (concentration + density) Founding attempts Theoretical background *Adapted from Carroll & Kessina (2005).

4. Success in founding attempts Population founding Organizational mortality Market structure (concentration + density) Founding attempts Theoretical background “Second selection process”

5. Success in founding attempts Population founding Organizational mortality Market structure (concentration + density) Founding attempts Theoretical background “First selection process”

6. 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).

7. 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)?

8. The model – The resource space Prob. of entering at position k

9. The model –Firm behavior Production costs Niche-width costs Large-scale firm Small-scale firm

10. 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).

11. 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.

12. The model – Price setting Minimum cost Firm’s price

13. The model – Firm entry diversity • 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.

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

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

16. Findings Property 2: Low entry diversity coupled with highly heterogeneous resource spaces generated a market shakeout characterized by an increasing number of firms that first reaches a peak, to be followed by a sharp decline.

17. Findings Property 3: Rectangular spaces generate fragmented market structures composed of small firms under high entry diversity, and homogeneous markets with medium-sized similar firms under low entry diversity.

18. Findings Property 4: The rate of market concentration change increases as entry diversity decreases.

19. Example – entrepreneurial inertia *Ruef (2006)

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

21. Thank you!