The Impact of Market Demand and Entry Costs on Market Structure

Our study contributes to the literature on industry and firm dynamics. We focus on the question why the number of firms in the semiconductor market follows an inverse U-shaped pattern throughout different product generations. We pay special attention to the fact that the number of firms declined after the mid 1990's. We disentangle the impact of changes in market demand and changes in entry costs on the number of firms in the market. We estimate a dynamic model in which firms make production, entry and exit decisions applying the two-step estimator developed by Bajari, Benkard and Levin (2007). A counterfactual experiment provides evidence that increasing entry costs (rather than diminishing growth in demand) is the main reason why the semiconductor industry experience a shake out in mid 1990's