The International Handbook of Competition
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The International Handbook of Competition

  • Elgar original reference

Edited by Manfred Neumann and Jürgen Weigand

This indispensable Handbook examines both economic and legal aspects of competition policy and industrial organization. It provides a scholarly review of the state of the art regarding economic theory, empirical evidence and standards of legal evaluation. The book aims primarily at furthering our understanding of the interplay between economic reasoning and legal expertise by concentrating on the fundamental issues and principles underlying competition policy.
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Chapter 3: Small Firms, Innovation and Competition

David B. Audretsch

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...

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