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Edited by Manfred Neumann and Jürgen Weigand
Chapter 3: Small Firms, Innovation and Competition
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...
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