Entry Gap in New Zealand Markets for Consumer Goods*

Manufactured

Tkis paper analyses two .New Zealand surveys conducted by the author in 1968-70, the first on patterns of consumption and the second on methods of production, costs and the optimal size of plant in manufacturing industries.' The consumer survey covered 50 families ; the rate of response was 92 per cent. Consumers were asked to provide information on their incomes, savings, assets and daily ex- penditures on different items for a period of one calendar month.* The production survey covered 85 industrial firms of varying size distributed throughout New Zealand ; 25 industries were involved. Cost accountants and production managers were asked to complete a 23-page questionnaire on production techniques, costs and optimal size of plant sales managers were questioned about their market behaviour and market strategies. The response was 87 per cent.'

In this paper the findings of the production survey are used to examine the optimal size of plant and the cost penalty of operating at less than that size in the case of 15 industries manufacturing consumer goods. Tke effect of market limitations on the production behaviour of the firms concerned is also investigated. The consumer survey is then employed to project consumption of the 15 commodities and to examine the size of the New Zealand market fo r these com- modities in 1990. Finally, market strategies of existing firms are considered and their effects on the entry of new h s evaluated.

* I should like to thank all those families and firms who made this study possible.

1The two surveys were financed by the New Zealand Universities Research Grant Committee and sponsored by Waikato University and Victoria University of Wellington.

2 The interviewing was carried out by students of Waikato University. Each student was responsible for one family and visited that family at least four times during the month of September 1968.

3 The interviewing of firms was conducted by the author. Each interview lasted four hours and the interviews were spread over the year 1970.

4Copies of each questionnaire are available on request. Thirteen per cent of the replies were excluded as unreliable. Comments on procedures of interviewing are also available on request.

575

576 THE ECONOMIC RECORD DEC.

I . Optimal Production in New Zealand Manufacturing Industries Eighty-five industrial firms were asked to provide information

on costs of producing different quantities of output. Table I features the basic economic characteristics of those firms. The sample was reasonably representative. It included a fair number of firms in each industry, located at different cities on the two Islands. The sample h s in most industries were responsible for over two-thirds of total industry production and employment. The sample covered small as well as large firms. Table I1 summarizes the cost-output relationships in 15 industries. It also indicates the relationship between the size of the domestic market and the minimum economic scale of pro- d u ~ t i o n . ~

TABLE I Economic Structure o f Manufacturing Firms Covered by

Industrial Survey

Industry

Flour milling Biscuits Butter Canned foods Soft drinks Beer Cigarettes Soaps Rubber shoes Rubber tyres Primary dry

Domestic wash- ing machinest

Domestic re- frigeratorst

Typewriters$ Cars

(assembly)?

batteries

To. of firm visited (sample firms)

7 5 2 7 5 3 2 5 2 2

- 2

2 n.a.

3

No. of sample

irms as % of total industry

firms

44 50 5

58 16 66 66 70 50 66

100

66

66 n.a.

50

Employmen of sample

irms as 9 of total industry

:rnployment

65 77 42 81 64 82 77 91 81 86

100

79

82 n.a.

66

Value-addec of sample

irms as 9 of total industry

value-added

71 82 46 87 71 88 83 94 92 91

100

86

91 n.a.

72

Size rank of sample

firms*

*The ranking is based on comparing sample firms with total industry firms. B(1) refers to the largest firm in terms of valueadded (average for 1966-70), B(2) to the two largest firms, and so on. S(1) refers to one small firm, S(2) to two small firms, and so on.

t Firms engaged in assembling only. :Data were collected from the engineers and sales managers of two service firms.

Source: New Zealand Manufacturers' Directory, 1969 to 1970; New Zealand Industrial Production, 196&69 and 1969-70; original data collected from the firms concerned; information supplied by the New Zealand Manufacturers' Association.

5 Data on optimal plant for flour, canned foods, soaps, tyres, typewriters and cars agree fairly well with those of J. Bain, Barriers to New Competition (Har- yard University Press, Cambridge, Mass., 1956). The optimal size or the minimum economic size is defined here as the size for which unit cost is minimal, applying the most efficient technique of production to all input requirements.

1973 ENTRY GAP IN N E W ZEALAND MARKETS 577 TABLJC I1

Relationship between Unit Cost and Scale of Output in New Zealand Manufacturing Industries'

Minimum economic production

measure- Volume Unit of

ment

Industry No. of plants of economic

size?

F!our. milling Biscuits Butter Canned foods Soft drinks

Beer

Cigarettes Soaps Rubber shoes Rubber tyres Primary dry

batteries Domestic washing

machines Domestic

refrigerators Typewriters Cars (assembly)

millions 20

'000 200

'ooo 250 'OOO 130 '000 45

1

0

0 0 1

'000cwt. 3,500 tons 4,000 tons 9,500

'OOO tons 20 millions bottles- 12 'OOO hectolitres 1,500 billions 6 million Ib. 50 'OOO pairs '000

Several Several Several Several

Several

3 or 4 2

2 or 3 1 or 2

1

Minimum estimated % rise in unit cost for outputs falling short of optimal economic pro-

duction by$ 75% 50% 25%

22 28 21 16

12

18 29 26 34 44

39

47

44 72 66

8 17 5 7

8

9 11 14 18 21

16

29

28 38 35

1 9 1 2

2

5 4 8 9

15

5

16

12 15 12

For the coverage of the figures on costs and economic production, see Section 5 (pp. 3-8) of the questionnaire on production methods and costs.

t Number of plants of economic size that can be established within the present New Zealand domestic market. The present size of the domestic market was measured by: Domestic Production + Imports - Exports. The average figure for the last five years was calculated and divided by minimum economic production to obtain the number of economic plans justified by the present size of the domestic market. 'Several' implies more than three.

t Whenever historical.cost data were lacking, estimates by engineers were used. These estimates were normally given in terms of a range estimate. W e chose the lowest figure. With historical-cost data, cost-scale curves of firms producing identical products were plotted against one another and the cost estimates of the most efficient firm (not necessarily the largest), at some particular scale, were taken. In other words, we concentrated on the envelope curve which linked the successive curves for all techniques offering minimum average costs at some particular volume.

It is clear from Table I1 that the present size of the domestic market is too small f o r economic production of such products as domestic washing machines, domestic refrigerators, typewriters and c a m 6 The market is also inadequate for such products as rubber footwear, rubber tyres and primary dry batteries. I n these industries market limitations have forced producers to operate at less than full capacity, t o incur higher costs of production and storage or even to use an inferior technique of production that relieved them of the problems of indivisibilities and/or discontinuities in the production

6 This refers to manufacturing rather than assembling.

578 THE ECONOMIC RECORD DEC.

function. The problem was greater for indigenous firms. Branches of foreign firms, particularly those with head offices in Australia, have been able to some extent to rely on export markets.

Large-scale capital intensive techniques had to be used in some cases because of labour shortage. I n certain instance-notably the women’s shoes industry-f emale workers were substituted fo r male because of their lower wage rates. Shortage of labour resulted in many firms operating only one shift and thus having a very high capital/ output ratio. Some managers (particularly in the paints industry) pointed to the difficulty of importing raw materials because they were not branches of foreign firms and had to 6nd external funds.

The domestic market for most New Zealand products is protected by a high tariff and a very restrictive foreign exchange system. In certain industries multi-plant firms predominate and some are opera- ting on a scale fa r beyond that required for minimizing unit cost.

Industrial mergers are not unknown in New Zealand. Fo r ex- ample, the number of firms producing cement was reduced from 6 in 1965 to only 2 in 1970.

Finally, the term ‘manufacturing’ may not mean quite the same thing in New Zealand as in other industrial countries. Although New Zealand managers talk of ‘car manufacturing’, ‘washing machine manufacturing’ and so forth, these are not really industries. All New Zealand has at present is a very limited process of assembling some 70 to 90 per cent of commodity parts which are, in the majority of cases, imported from overseas. The market in these instances is obviously too small for economic p rod~c t ion .~

I I . Projection of Consumer Demand for Manufactured Goods The New Zealand domestic market may widen sui3ciently in the

near future to justify economic production of those articles that cannot be produced efficiently at the present and to enable more firms to enter the market and enhance competition in those industries where limited numbers of firms are operating at present.

The information provided by consumers in the family budget survey was analysed to project future consumption of the 15 com- modities studied in Section I.8 For the rational formulation of demand projection i t was important to obtain first a well-organized description of actual demand behaviour. Income and prices are the main factors

7See P. G. Elkan, ‘Estimating New Zealand Manufacturing Output in a Common Market with Australia’, Technical Memoranda (New Zealand Institute of Economic Research, Wellington) ; and D. C. Sewell, ‘Electric Household Durable Goods’, Research Paper No. 7 (New Zealand Institute of Economic Research, Wellington, 1965).

8 The economic characteristics and patterns of expenditure of the households covered by the survey were described in a previous article by the author, ‘House- hold Expenditure Patterns : Hamilton, New Zealand’, Economic Record, Vol. 46, March 1970, pp. 73-85. This section is concerned with other aspects of the study. Also the data used here, though extracted from the same questionnaires, were not published in the earlier article.

1973 ENTRY QAP IN N E W ZEALAND MARKETS 579

that might be expected to produce variations in the observed patterns. Other factors such as family size, geographical location, social class and climate are not necessarily less important and there are certain formal methods (including the analysis of variance and the use of dummy variables) for detecting wbether such factors have a signifi- cant bearing on the pattern of demand for a given consumption item.

In this section we shall only consider consumption as a function of income. If there are no discontinuities, it would be possible to have a consumption-income relationship embodying two properties : (a) an initial income level below which the commodity is seldom bought, and (b) a saturation level which provides an upper limit to the consumption of the commodity. These two properties imply that income elasticity gradually diminishes as income increases, possibly from values higher than unity down ultimately to a value of zero. The distinction between the luxury stage and the necessity stage of a commodity is usually identified with an income dividing line at which the elasticity equals unity.

Equation Methods of estimation

- (1) X = a + BY Direct least squares (2) X = a - B/Y

(3) x = ayfl

(4) x = eu- f i l r

Least squares via reciprocal transformation

Least squares via double-log tramformation

Least squares vk logarithmic reciprocal transformation

transformation Least squares via double-log

reciprocal transformation Maximum likelihood$

(5) y = e-a I@ex /@ Least squares via semi-log

(6) X = ea-B1ylYy

(7) X = C $I oo -&e-tz/z dt

where t = lm + BlnY Maximum likelihood8 ez

1 + ez (8) x = q = - dz

where z = a + BlnY

Proportional rate of growth

at rBY/X rB/X Y

rfi rS/ Y

rB/X

.(/I - yY)/Y

r p ( a Y @ ) h(orYB)

X and Y denote I)er cavifa consumotion (of a aiven commodity) and income respectively: ~~ ~ ~

a, fl and y are constant kameiers to be es8mated. t The rate of growti is given by: u = d 9 / d l . 1 /S , where dX/dt = d X / d Y . d Y / d f . Y is aeaumed

to grow a t a constant rate r or Y - I’ e’t, and thus the (proportional) rate of growth is glven by d X / d Y . rY/X. or u = er. ;hire c i s the co%Bcient of income elasticity of demand and r is the (constant) rate of growth of per capita income.

$ A(f) designates the area and L ( f ) the ordinate of the log-normal distribution function a t the value oft = ln(orPb). For the maximum likelihood method of estimating the three parametem Q a and f l see J. Aitchiarn and J. A. C. Brown, The Lognormal Diefribvliuti wifh Spm’al Referenre to it8 U8e8 in ’Eeonomic8. Department of Applied Economics, Monograph 5 (University of Cambridge, 1967).

5 See P. R. Fink, ‘Maximum Likelihood Eetimation of Tornqvist Demand Equations’, Revim of Economic Studiea. Voi. XSVI, October 1968, pp. 33-51. The valuea of I (logit) and its Integral P ( r ) are readily available in the m e of the log-normal.

580 THE ECONOMIC RECORD DEC.

TABLE IV Projected Rate of Growth of Certain Consumer Goods in New Zealand

Flour Biscuits Butter Cennedfoods Softdrinks Beer Cig-ttes Soaps Rubberehoes Rubbertyres Primary dry

batteries Domeetio

maohmee

refrigerators

( m m b l y )

weshifg

Domestic

Typewriters CerS

0.869 0.998 0.868 0.743 0.927 0-906 0.911 0.894 3.155 3.036 3.403 3-115 3.191 3.002 3.412 3.264 0.781 0.806 0.864 0.842 0.901 0.811 0.889 0.912 2.424 2.512 2.121 2.012 2.261 2.411 2.341 2.189 1.064 1.261 1.341 1.112 1-203 1.019 1.311 1.412 1.672 1.862 1.728 1.561 1.619 1.696 1.742 1.838 1.792 1.671 1.692 1.394 1,423 1.462 1.622 1.501 0-746 0.812 0.801 0.741 0.900 0.812 0.931 0.972 2.001 1.699 1.892 1.819 1.964 1.911 2.107 2.001 2.831 2.431 2.640 2.519 2-711 2.533 2-782 2.689

2-421 1.988 2.106 1.918 2.203 2-001 2.374 2.171

3.214 2.701 2-906 2.761 2.821 2.453 2.300 3.205

3.116 2.781 3.012 2.723 2.839 2.401 3.311 3.146 3.210 2.819 2.981 2.894 2.908 2.811 3.012 3.108

4.612 3.911 4.109 3.882 3.981 3-992 4.264 4.102

Best fltting and best

estimate of 0

(6) 0.927 (7) 3.412 (4) 0.842 (8) 2.189 (5) 1.203 (8) 1.838 (7) 1.622 (5) 0.900 (7) 2.107 (3) 2.640

(7) 2.374

(3) 2.906

(3) 3.012 (8) 3.108

(3) 4.109

Eight forms of equations and the method of estimation for each are given in Table 111. The proportional rate of growth of consump- tion is also shown for each equation. T'he regression results for all eight formulae are set out in Table IV.Q The best fitting was the one that minimized the error variance

where E(X) is the expected value of X obtained from each regres- sion.l0

The data on national income and population for 1955-70 were used in deriving the (proportional) rate of growth of consumption (a). The (constant) rate of growth of national income ( r ) was esti- mated from the equation

log P = A + rt where A = log Po, Po being the initial income, r the rate of growth of per capita income, and t time."

QTime series data were also used in projecting future consumption, with no significant changes in the results. The results are available on request.

10 All a and B were significant at the 5 per cent level. 11Fitting various forms of equations to the same set of data often reveals

that differences in estimates obtained from alternative equations are least a t the mean-income level ; estimated levels of consumption as well as income elasticity deviate markedly from one equation to another when one moves away from the mean level of incomes. See, for example, L. M. Goreau, Monthly Bulletin of Agricultural Economics and Staristics (Rome), Vol. IX, No. 10, 1960.

52 = L [ X - E ( X ) ] 2

1973 ENTRY QAP IN NEW ZEALAND MARKETS 581 In the past fifteen years the New Zealand economy recorded a

rate of growth of national income of 5.64 per cent a year at current prices and 3.4-4 per cent a t 1954-55 prices.12 In the view of aome New Zealand economists this rate of growth is unlikely to be sustained in the absence of long-term marketing arrangements for New Zealand primary products.13

Depending on export performance, maximum growth of output over the next two decades is likely to be in the range of 3 to 5 per cent a year with a simple average of 4 per cent. The rate of popula- tion growth will depend on the net annual migration and may range between 1 .5 to 1.8 per cent a year,14 with a simple average of 1.6 per cent. T’his puts the projected annual rate of growth of output per capita at approximately 2.4 per cent.

I I I . Present and Future Size of Entry Gap Table I1 shows that in some industries New Zealand’s domestic

market is large enough for several plants of economic size. In certain industries multi-plant firms exist alongside single-plant firms. More- over, in some industries numbers of firms are operating on a scale fa r beyond what was regarded by their production managers and cost accountants as optimal. Continuous injection of new brands backed by heavy advertising campaigns, credit facilities and (in a few cases) price discounts had enabled many of those firms to expand their share of the market.

An entry gap thus exists in at least a few consumer markets, a gap that has failed to attract the new-comers it might owing to the market strategy of existing firms. The size of this entry gap may be measured as follows:

- Wij - 2,) PEG= -

21

where xu is the level of output of the i’th firm operating on a scale larger than the optimal scale of producing the j’th commodity; xj is the optimal scale of producing the j’th commodity; and PEG is the present entry gap in terms of potential number of new-comers.

On the basis of the rates of growth of per wpda consumption given in Table IV, the size of the domestic market in 1990 was ascer- tained, assuming an annual rate of population growth of 1.6 per

-

12This rate of growth was calculated from the formula: y1968-69 = ‘1954-55

where Y is gross national product, and I its (constant) rate of growth. 13See C. A. Blyth, ‘Strategic Factors in New Zealand Economic Growth,

1965 to 1975’, Research Paper No. 8 (New Zealand Institute of Economic Re- search, Wellington, 1965).

1 4 For projecting New Zealand population we used the formula: ~ 1 9 9 0 = PI970 e”‘l

where P is population and q is rate of growth assuming (a) 5,OOO outflow and (b ) 5,000 inflow of migrants.

582 THE ECONOMIC RECORD DEC . cent. The magnitude of the future entry gap was then estimated using the formula:

5 - x i

‘ j

PEG =

where Gr is the projected size of the market for the j’th commodity in 1990; x j is the present size of the market for the j’th commodity; and ij is the optimal scale of producing the j’th commodity (assumed to be constant between 1970 and 199O).I5

Table V summarizes the results for the 15 commodities studied. It can be seen that only in a few cases would the present market permit the entry of new firms. The size of the entry gap, however, is likely to widen in the future and thus, if not closed by existing firms, will tend to enhance competition.

ZV. Narket Strategies of Existing F i r m and the Entry Gap Existing firms of economic size may very well t ry to reap the

expansion in demand themselves through different market strategies. In the absence of price variations, these strategies may include adver- tising, injection of new braads, credit facilities, and service facilities.

TABLE V Present and Future Size of Entry Gap in New Zealand

Consumer Yaakets

No. of single-plant firms that could enter N.Z. domestic markets*

Commodity market I

In 1970 1 Between 1970 and 1990 I Flour Biscuits Butter Canned foods Soft drinks Beer Cigarettes Soaps Rubber shoes Rubber tyres Primary dry batteries Domestic washing machines Domestic refrigerators Typewriters Cars (assembly)

Several 1

Several Several Several

1 None None None None None None None None None

Several 2 or 3 Several Several Several 2 or 3 1 or 2

1 1 1 I

None None None

1

‘Several’ implies more than three.

15 Technological changes may result in an increase or a decrease in the optimal size. This will reduce or increase the future size of the entry gap as the case may be. Such changes, however, are unlikely to upset the conclusions.

1973 ENTRY GAP IN NEW ZEALAND MARKETS 5 83

The sales managers defined what they call ‘survival costs’. These are the costs incurred in pursuing one o r more of the previous strategies (price discounts should also be included where they exist). Such costs are inevitable to ensure growth a t a rate not less than the rate of growth of the consumption of the commodity as a whole and to develop consumption habits to maximize the number of attached customers.

The costs of survival (or promoting the product) impose upon the firm a total cost function different from that of a firm operating in a perfectly competitive market. Total costs of production and marketing were analysed for 32 firms covering 10 industries.I6 Four formulas were fitted, namely :

c = a + p x C = A + p X + y X2 C = A + p X + y X2 + 8 X3 C = AePx

where C is total costs of production and marketing, A is total fixed costs, X is total output of sales, and p, y and 8 are parameters. The linear function was found more adequate in two cases, the quadratic function in six, the cubic €unction in six, and the last function in eighteen.17

The market behaviour of the i’th firm can be expressed as:18

x,, = ~ , , [ 1 + ~ ( x , / A , ~ ) ~ - ( ~ / ~ ) ] + (1//V1-(’’‘)~aX0 (1)

where Xo = total sales of the industry in period 0 X, = total sales of the industry in period t

a = proportion of total industry sales bought by unattach-

6 = rate of growth of total consumption of the article ed consumers

Xco = total sales of the i’th firm in period 0 X,, = total sales of the i’th firm in period t & = total sales of the i’th fbm in period 0 to attached con-

sumers p = proportion of total industry sales to unattached con-

sumers accruing to the i’th firm T = average unit cost of survival (promotion or market-

ing) for the rest of the industry Ti = unit cost of marketing by the i’th firm S = T J T ; O < S < 0 0 .

16 Each firm supplied data on cost-output relationships for the last fifteen years. The industries concerned were flour milling, biscuits, butter, canned foods, soft drinks, beer, cigarettes, soaps, rubber shoes, and rubber tyres.

17The ranking of the equations was based on the value of the error variance S2 = z[C - E ( C ) ] z , where E ( C ) is the expected value of C obtained from each regression. The best fitting was the one that minimized s2. All B, Y, and 6 were significant at the 5 per cent level.

18 See Appendix.

584 THE ECONOMIC RECORD

This gives us:

For S = 0, Xi, = A,. For 0 c S < 1; Xi, = Ato(1 + 6’) -I- B ’ d o

DEC.

where 6’ < 6; /3’ < p. For S = 1; X,, = Ai,(l + 6) + pax,. For 1 < S < a; X,, = Aio(l + 6”) + /3”aXo

where 6” > 6; 8” > p 6”A,, < 6 X o ; < 1.

For S = a; X,, = A , , + 6X, + ax,. (6)

Equation (2) implies that if the i’th firm did not bother promo- ting its product i t would end up with sales to only its attached customers (Ao) , losing all the unattached customers to other firms ( p = 0) and gaining none of the expansion in total demand (8Ao = 0). Equation ( 3 ) implies that if the i’th firm spends rela- tively less than the rest of the industry on attracting new business and keeping its present attached customers, its market position will deteriorate in two ways: (a) through gaining a smaller share of the expansion in total demand for the product (8’ < 8) ; and (b) through losing some of its unattached customers to other Grms (p’ < p ) . Equation ( 5 ) implies that if the i’th firm spends relatively more than the rest of the industry on promoting its product, it will expand a t a faster rate than the rest of the industry (8” > 6) and will attract relatively more unattached customers (p” > p ) , Equation (4) implies that if the i’th firm puts the same effort into promoting its product as the rest of the industry, its sales will expand at the same rate as the total market (= 8 ) and its share of sales to the unattached cus- tomers will also remain constant (= p ) . Finally if the i’th firm was the only firm in the industry promoting its sales, it will reap all the expansion in total demand plus all the unattached customers. This is implied by equation (6 ) .

Now, if total costs of manufacturing and marketing is best fitted by :

C = Fey’ (7) we can write:

If we denote the i’th firm’s profit by rr, = PX4 - C ( X 4 ) , i = 1,

1973 ENTRY QAP IN NEW ZEALAND MARKETS 585

. . . n, where P is the market price,l0 X output and C total cost (at current prices). If each competitor regards the price as k e d and tries to maximize his profit, we have:

whence 0 = P - C ' ( X , ) ;

substituting (9) into (8) we get: (9)

It was possible for us to compare the optimal strategy derived from equation (10) with the actual strategies of 14 firms covering 6 industries which keep regular consumer and market surveys and were able to provide us with the required information.20 Table V I summarizes the results. It can be seen that in the majority of cases the cost of promoting the product is excessive, indicating that the primary concern of the h in question is probably maintaining (or even expanding) their market shares rather than maximizing their profits.

V . Conclusions Despite its limitations, this study has some interesting findings.

First, market limitations a r e probably the most decisive factor restricting competition in a small economy like New Zealand. At present the local market for such products as domestic washing machines, domestic refrigerators, typewriters and caw is too small to justify the establishment of even one plant of economic size. Nor is the future outlook for these products particularly promising. In the absence of export outlets or of eEcient production techniques suitable for small-scale operations, the only way of overcoming the problem of market limitations is through co-operative action with

19 We are only dealing in this section with homogeneous products for which a market price can be assigned. In this paper price is the wholesale market price assigned to a specific product: 100 cigarettes, 100 gallons of beer, 100 lb. of toilet soap, etc. Whenever different sizes or grades of specific product (e.g. different sizes of passenger car tyres) were involved, a weighted price was used.

20 The values of S are calculated for 1970. Equation 10 was used in calculating the optimal values of S (using an iterative method). In equation (10) : P, the market price, is known to the firm and was given to us by the firm concerned. 6, the estimated rate of growth of total consumption, was calculated from the data given in Table IV. A u and X, are known to the firm ; so are a and B, if the firm keeps regular consumer and marketing surveys. c and P were estimated from the cost function using the formula (for 15 observations) : log C = y + v X , where y = log p. Other cost functions were tried but with no significant changes in the results. All Y were significant at the 5 per cent level. The actual values of S were estimated from the relation T,/T, as given by the salesmen of the firms concerned.

586 THE ECONOMIC RECORD DEC . TABLE VI

Optimal and Actual Market Strategies in New Zealand Manufacturing Industries

Industry

Biscuits

Soft drinks

Beer

Cigarettes

Soaps

Rubber tyres

Firm

A B C

A B C

B

32 27 18

8 10 8

38 31

33 41

18 22

32 36

S (actual) S (optimal)

1.119 1.110 1.162

1.144 1.157 1.140

1.155 1.193

1.188 1.200

1.125 1.117

1.001 1.020

neighbouring countries, particularly Australia. It is beyond the scope of this paper to balance the merits and shortcomings of moves in this direction.

Secondly, for some consumer goods such as flour, butter, canned food4 soft drinks, and beer, cigarettes, soaps and probably rubber shoes, the present domestic market is large enough for economic production. Moreover, the rate of expaasion of demand for many products (e.g. rubber tyrea and primary dry batteries) may be suf- ficiently rapid to widen the entry gap in say the next twenty years. The market strategies pursued by existing firms may, however, close the market against new-comers. The survival costs incurred by exist- ing h a have been excessive in most cases, suggesting that theae firms are aiming a t something other than maximum profits. T'hey may, for example, be thinking more in terms of market shares. This could result in a mall number of (over-sized) h s operating in an oligopolistic market situation with all the attendant evils of higher prices and restricted output.

Finally, technological factors are not of c o m e the only barriers to entry. Probably more important are lack of finance and the high rates of return offering in other fields, particularly those with a speculative element. Thus even keeping the market strategies of existing h s at the optimal will not guarantee the entry of new firms to cater for an expanding market. Perhaps there is need for

1973 ENTRY QAP IN NEW ZEALAND MARRETS 587

greater amounts of direct investment by government to promote manufacturing industry and enhance competition.

M. M. METWALLY University of Queensland

APPENDIX Derivation of Equation (1)

X ' = v(6, B ) (1) %A0 = %(S) (2)

Paxo = v 3 ( S ) ( 3 )

(4) such that :

AX' = X't - X'O U t = - (X ,o - A o ) = -8aXa, for S 1 0 AXt = 6' A, , + @ a x o , for 0 < S < 1,

where 0 < S' < 8, and 0 < B' < B. AX1 = 8" Ago + B"ax0, for 1 < S < a

where 8" > 8 ; 8" Zto < 8 X O ; B < B" < 1. AX, = 8 At, + B a x o , for S = 1 AX, = 8 X o + (1 - B)aXo.

An equation that satisfies the functions ( 1 ) to ( 3 ) and the constraints i to v can take the form:

AX{ = 6 ( X a / a ' o ) l - l / S + BaXo(1/B)1--'/S - 1 ) . (5) Substituting ( 5 ) into (4), we get:

Xct = Xto + SAco(Xo/Aco)1--1/~ +BOX, [ ( l / S > - ' - l ' S - l l . ( 6 ) (7)

Substituting ( 7 ) into ( 6 ) , we get: (8)

which is equation (1) in the text.

( i ) (ii)

(iii)

(iv) (V)

But X , , = Ato + Fax,.

X t t = Ato[I + 8 ( X o / A t o ) 1 - 1 / s I + (I /B) l - - ' ISBaXo