March 30, 2011 4:00 PM - 5:30 PM
Economists have long sought to understand how product-specific traits drive industry outcomes, but the conclusions that could be drawn have been limited by shortage of dynamic competitive theories and empirical fact. The paper draws on a theoretical model in which technological opportunity drives industry evolution, fueling a spiral of advantage that allows a few firms to dominate in the long run in specific types of markets. The theory has distinctive implications that can be tested using a new type of long-period, cross-sectional, cross-national industry data on narrowly-defined product markets. To meet these extremely demanding empirical requirements, the paper marshals novel data that span many decades for 18 matched industries in the US and the UK.
Several new and important empirical results emerge from the tests. Previous work had found that static industry concentration levels are similar in matched industries across countries, but moreover the entire process by which industries evolve to their static outcomes turns out to occur similarly for the same industry in the two different countries. Some industries have strong shakeouts in firm numbers and others not, confirming the heavily-cited findings of Gort and Klepper (1982), which had not yet been verified using alternative data. In industries with shakeouts entry eventually nearly ceases, but in industries without shakeouts entry remains high. Even in industries with strong shakeouts there is not necessarily a rise in firms' rate of exit coincident with the shakeout, adding to confirmation that shakeouts are not driven by single technological events. The theory and evidence explain why early mover advantage has been observed sporadically in industries, showing it is tied up with the spiral of firm advantage that yields shakeouts, so that only in industries with substantial shakeouts do early movers experience low exit rates relative to incumbents.
The evidence corroborates the idea that technology is the usual driving force behind these typical inter-industry outcomes. Patents on technologies for the existing product and its manufacturing methods (excluding technologies that yield alternative products) act as a proxy for firm-specific innovation. Leading early entrants dominate these patents in industries with substantial shakeouts, and patenting enhances survival mainly in industries with shakeouts. Thus in most industries, within-firm technological innovation seems to drive alternative industry competitive dynamics, through a spiral of firm advantage in industries with high opportunity for product improvement and process innovation.
The paper can be read at: http://www.rpi.edu/~simonk/pdf/pmcid.pdf