Industrial Policy to Develop a Multi-Firm Industry

Tigran Melkonyan (), Dwayne Banks () and Jeanne Wendel
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Dwayne Banks: Our Lady of the Lake University of San Antonio

Journal of Industry, Competition and Trade, 2017, vol. 17, issue 3, No 3, 283-303

Abstract: 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.

Keywords: Jump-starting a multi-firm industry; Entry promotion; Entry deterrence; Subsidy (search for similar items in EconPapers)
JEL-codes: H2 L1 L5 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10842-016-0242-z

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