On the Theory of Product Market Characteristics and the Industry Life Cycle

Does industry competition depend largely on product-specific traits? If so, what traits matter how? A model is developed in which the nature of technological opportunities in an industry affects industry evolution over long periods following the inception of a product. Continuous-time firm decisions dictated by optimal control theory provide a mathematical basis for proofs of inter-firm differences and industry outcomes. Analysis of the model shows that, with firms optimizing discounted profit streams by choosing entry, exit, growth, and research spending, alternative industry dynamics arise depending on the degree of relevant technological opportunity. The theory provides an explanation for why some industries experience shakeouts and concentration while others do not, and matches with rich empirical findings reported in a companion paper.

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