the case of the synthetic dye industry, 1857–1914 - Maastricht ...

202 J.P. Murmann and E. Homburg
the global leaders. By producing a large number of chemical intermediates, these
firms were able to offer a full portfolio of dyes that smaller firms could not
deliver to their customers. Because they give larger firms a lower cost structure,
economies of scale and scope can act as general forces that, over time, eliminate
smaller competitors from the market.
Technological dynamics
Technological dynamics can have a direct impact on industrial dynamics. The
invention of synthetic dyes destroyed the business of natural dye growers. When
substitute products are created, existing producers who are not able to switch to
a new technology are likely to be eliminated. 31 Technology can also change the
minimum efficient scope and scale (the plant size at which production cost per
unit is lower than at any other size). In the dye industriy, for example, production
equipment was scaled up dramatically from 1857 to 1914. In many industries
technological innovation increases the minimum efficient scale. But technological
innovations can also have the opposite effect of decreasing the minimum efficient
scale. An example is the invention of minimills in the steel industry. As a general
hypothesis, we propose that increases in the minimum efficient scope or scale
reduce the number of firms, and decreases in the minimum efficient scope or
scale increase the number of firms.
Positive feedback
Much of economic theory is based on the logic of negative feedback. If prices
for a commodity increase substantially, new producers will enter the market and
the additional quantities of goods on the market will bring prices down again. In
a world of negative feedback, the development of advantages in market share,
industrial infrastructure, or in legal environment will not make a difference over
time. The incentives for other players to catch up will be large and with time
lead to a competitive equalization of positions. In a world of positive feedback,
however, small differences in conditions can translate into large differences in
outcomes over time (Arthur, 1994). The monopoly of La Fuchsine that led to a
shakeout in France appears to have given German firms a small advantage that
they were able to translate into a complete domination of the French dye industry
before the First World War. The central feedback mechanisms in this setting were
profit levels and investments in new firm capabilities, and later lobbying efforts.
Initially small differences in market share were translated into large differences
in market share because successful firms could invest more than less successful
rivals. A firm that made less money possessed fewer resources to invest in the
31 Among the firms that switched from natural dyes to synthetic dyes early on were Jäger, Knosp,
and Geigy and later Thomas Frères (madder producers). When synthetic alizarin killed the madder
business, the largest Dutch madder producer, Salomonson, successfully switched to making phosphate
fertilizers.