THE DYNAMICS OF ENTRY, EXIT AND PROFITABILITY - AN ERROR-CORRECTION APPROACH FOR THE RETAIL INDUSTRY

We develop a two equation error correction model to investigate determ inants of and dynamic interaction between changes in profits and numbe r of firms in retailing. An explicit distinction is made between the e ffects of actual competition among incumbants, new firms competition a nd potential competition from firms outside the market. Effects of cos t, demand and general income changes on profitability are investigated to gain insight in the role of retailing in the cost, demand and wage inflationary processes. The relative importance of profitability, gro wth and unemployment as determinants of net entry are studied. The mod el is tested using a panel data set of 36 Dutch shoptypes covering the 1977-1988 period.