Industrial Policy to Develop a Multi-Firm Industry
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Authors
Melkonyan, Tigran
Banks, Dwayne
Wendel, Jeanne
Issue Date
2017
Type
Article
Language
Keywords
Entry deterrence , Entry promotion , Jump-starting a multi-firm industry , Subsidy
Alternative Title
Abstract
Governments face pressure to act when coordination and learning externalities block development of otherwise-profitable industries that would produce merit goods for the domestic market. A short-term subsidy that offsets these externalities could potentially jump-start a multi-firm industry, if the subsidy induces a pioneer firm to enter and then the pioneer's first-period output generates coordination and learning externalities. These externalities could induce subsequent entry by input suppliers and/or competitors. However, empirical evidence raises questions about the ability of governments to use short-term subsidies to jump-start new industries. We explore one explanation for the difficulty of jump-starting new industries: the subsidy could generate counter-productive incentives for the pioneer firm to prevent entry of additional firms. We model the jump-start strategy and examine whether coupling a short-term fixed subsidy with a per-unit subsidy can achieve the objective of creating a multi-firm industry.
Description
Citation
Melkonyan, T., Banks, D., & Wendel, J. (2017). Industrial Policy to Develop a Multi-Firm Industry. Journal of Industry, Competition and Trade, 17(3), 283�"303. doi:10.1007/s10842-016-0242-z
Publisher
License
Creative Commons Attribution 4.0 International
Journal
Volume
Issue
PubMed ID
ISSN
1566-1679