Market Size, Sunk Costs of Entry, and Transport Costs
This paper uses plant-level, panel data from the Ethiopian manufacturing census to estimate the effects of demand-side and supply-side factors on industrywide aggregate productivity. The paper focuses on the effects of three factors: (1) local market size, (2) the value of transportation costs that firms incur in selling to customers outside their market, and (3) licensing fees needed to enter the market. Identification is based on a model of production under monopolistic competition, which enables interpreting the estimated coefficients of a reduced form, dynamic productivity equation. The paper analyzes 11 industries in Ethiopia over 2000 to 2010. Several interesting results emerge. In the most parsimonious specification, the estimated coefficients are consistent with all three predictions of the model—but only for one industry: cinder blocks. In this industry, the expansion of the local market boosts industrywide total factor revenue productivity, while increases in transport costs and licensing fees reduce it. The picture is somewhat mixed in the other 10 industries but broadly consistent with the predictions of the model.
| Main Authors: | , , , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019-06
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| Subjects: | MANUFACTURING, INDUSTRIALIZATION, MICROECONOMIC ANALYSES, TRANSPORTATION COST, FIRM ENTRY, |
| Online Access: | http://documents.worldbank.org/curated/en/732571560169924956/Market-Size-Sunk-Costs-of-Entry-and-Transport-Costs-An-Empirical-Evaluation-of-the-Impact-of-Demand-Side-Factors-versus-Supply-Side-Factors-on-Manufacturing-Productivity https://hdl.handle.net/10986/31865 |
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| Summary: | This paper uses plant-level, panel data
from the Ethiopian manufacturing census to estimate the
effects of demand-side and supply-side factors on
industrywide aggregate productivity. The paper focuses on
the effects of three factors: (1) local market size, (2) the
value of transportation costs that firms incur in selling to
customers outside their market, and (3) licensing fees
needed to enter the market. Identification is based on a
model of production under monopolistic competition, which
enables interpreting the estimated coefficients of a reduced
form, dynamic productivity equation. The paper analyzes 11
industries in Ethiopia over 2000 to 2010. Several
interesting results emerge. In the most parsimonious
specification, the estimated coefficients are consistent
with all three predictions of the model—but only for one
industry: cinder blocks. In this industry, the expansion of
the local market boosts industrywide total factor revenue
productivity, while increases in transport costs and
licensing fees reduce it. The picture is somewhat mixed in
the other 10 industries but broadly consistent with the
predictions of the model. |
|---|