Product Market Characteristics and the Industry Life Cycle v1r10

A theoretical model implies that technological opportunity drives industry evolution, fueling a spiral of advantage that allows a few firms to dominate in the long run in high technological opportunity markets. Distinctive implications are tested using new long-period, cross-sectional, cross-national (US and UK) industry data on narrowly-defined product markets. The process by which industries evolve to their static outcomes is found to occur similarly for the same industry in the different countries. Some industries have strong shakeouts in firm numbers and others not, confirming findings of Gort and Klepper (1982) on the first large set of alternative data. In industries with shakeouts entry eventually nearly ceases, but in industries without shakeouts entry remains high. Even in strong shakeouts there is not necessarily a rise in firms’ rate of exit coincident with the shakeout, confirming that shakeouts are not driven by single technological events. The theory and evidence explain why early mover advantage 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. Technological patterns conform to those expected if technological opportunity drives typical industry outcomes. Leading early entrants dominate relevant patents in industries with substantial shakeouts, and patenting enhances survival especially in industries with shakeouts. Thus technological innovation seems typically to drive alternative industry competitive dynamics, through a spiral of firm advantage in industries with high opportunity for product improvement and process innovation.

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