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Technological Extinctions of Industrial Firms: An Inquiry into their ...

Technological Extinctions of Industrial Firms: An Inquiry into their ...

Technological Extinctions of Industrial Firms: An Inquiry into their Nature and Causes Steven Klepper and Kenneth L. Simons Carnegie Mellon University and Royal Holloway, University of London February 1997 We thank David Hounshell, John Miller, Richard Rosenbloom, and two anonymous referees for helpful comments. Klepper gratefully acknowledges support from the Economics Program of the National Science Foundation, Grant No. SBR-9600041.

1 Technological Extinctions of Industrial Firms: An Inquiry into their Nature and Causes Steven Klepper and Kenneth L. Simons Abstract After a buildup in the number of firms, new industries commonly experience a "shakeout" in which the number of firms declines sharply. Three theoretical perspectives on how technological change contributes to industry shakeouts are analyzed. The theories are used to synthesize predictions concerning technological change and industry evolution. The predictions inform an analysis of four U.S. industries that experienced sharp shakeouts: automobiles, tires, televisions, and penicillin. Using data on firm participation and innovation from the commercial inception of the four products through their formative eras, we uncover regularities in how the products evolved. The regularities suggest that shakeouts are not triggered by particular technological innovations nor by dominant designs, but by an evolutionary process in which technological innovation contributes to a mounting dominance by some early-entering firms. 1. Introduction Many manufacturing industries, such as automobiles and aircraft, have long been composed of a few dominant firms and a small fringe of competitors. While it is customary to think of these industries as tight oligopolies, they were not always this way. During their early years, these industries were typically composed of a much larger number of firms vying for leadership. They took on a structure closer to their modern form only after passing through a period in which there was a sharp drop or shakeout in the number of producers. For example, Thomas’ Register of American Manufacturers lists almost 400 automobile manufacturers in 1910, nearly 15 years after the start of the automobile industry. By 1925 there were only about 80 automobile manufacturers listed in the Register, an 80% decline in 15 years. Judging from the 46 major new products studied by Gort and Klepper [1982] and Klepper and Graddy [1990], a majority of new products pass through periods in which there is a pronounced decline in the number of producers. While the shakeouts of the 46 products were not generally as severe as in automobiles, products often sustained a decline of 50% or more in the number of producers during their shakeouts. What could cause these dramatic shifts in market structure? A leading candidate is technological change. A growing number of theories portray technological change

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