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Entry and Exit Decisions with Switching Regime Excess Capacity

Sheng-Ping Yang ()
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Sheng-Ping Yang: Gustavus Adolphus College

International Advances in Economic Research, 2018, vol. 24, issue 4, 351-369

Abstract: Abstract This paper examines how expected excess capacity fosters impediments to entry and incentives to exit. To examine this phenomenon, we apply the switching regime methods of Goldfeld and Quandt to a logit model using data from the U.S. aluminum industry over the period 1954 through 2010. The results show that both entry and exit decisions are statistically significantly affected by excess capacity. However, the correlation of entry and exit with capacity is more significant than with production. The evidence implies that excess capacity in the aluminum industry rises to be a substantial threat to entry only when the company produces ahead of demand growth. Excess capacity is also an impetus to exit during the later stage after primary aluminum production reverts to a declining trend.

Keywords: Aluminum industry; Excess capacity; Logit analysis; Probability of entry and exit; Switching regimes (search for similar items in EconPapers)
JEL-codes: C24 C25 L11 L13 L70 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11294-018-9716-6

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