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Audretsch, David B. --- "Small Firms, Innovation and Competition" [2004] ELECD 179; in Neumann, Manfred; Weigand, Jürgen (eds), "The International Handbook of Competition" (Edward Elgar Publishing, 2004)

Book Title: The International Handbook of Competition

Editor(s): Neumann, Manfred; Weigand, Jürgen

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843760542

Section: Chapter 3

Section Title: Small Firms, Innovation and Competition

Author(s): Audretsch, David B.

Number of pages: 27

Extract:

3 Small firms, innovation and competition
David B. Audretsch



1 Introduction
From the perspective of the static model of industrial organization, the entry
of new firms is important because they provide an equilibrating function
in the market. In the presence of market power, the additional output
provided by the new entrants restores the levels of profits and prices to
their long-run competitive equilibrium. However, as Geroski (1995) points
out in his comprehensive survey on `What Do We Know About Entry?' the
actual amount of output in markets contributed by new entrants is trivial.
He reports from an exhaustive empirical literature that the share of total
industry sales accounted for by new entrants typically ranges from 1.45 to
6.36 per cent. This would seemingly suggest that new entrants contribute
insufficient additional output to provide a competitive threat to incumbent
firms. The implications for competition policy under this static perspective
are that policies encouraging new-firm entry will contribute little in terms
of fostering market competition. Thus competition policies in both Europe
and the United States have traditionally focused on reducing barriers to
entry for existing incumbent enterprises rather than on reducing barriers
to the start-up of new enterprises.
However, a recent literature analyzing the dynamics of firms and industries
suggests that the contribution of new and small firms to the dynamics of
competition is significantly greater than found in a static analysis. There are
two reasons why new-firm entry generates more competition in the dynamic
than ...