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

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

2 and market structure

2 and market structure as either coevolving (e.g., Nelson and Winter [1978], Flaherty [1980], Metcalfe and Gibbons [1988]) or simultaneously determined (e.g., Dasgupta and Stiglitz [1980], Shaked and Sutton [1987]). Indeed, recently three models featuring technological change have been proposed to explain industry shakeouts. In Jovanovic and MacDonald [1994], a major innovation triggers a shakeout by forcing out of the industry those firms unable to develop the follow-on innovations to the major innovation. In Utterback and Suarez [1993], a coalescence of producers around a de facto product standard triggers a shakeout by forcing out of the industry those firms less proficient at producing the standard. Last, in Klepper [1996] increasing returns from R&D precipitates a shakeout by causing entry eventually to dry up and continually forcing the smallest firms to exit. To date, tests of these theories and others that link market structure to technological change have been limited. The primary purpose of this paper is to develop detailed evidence about the evolution of products that experienced shakeouts in order to evaluate the three shakeout theories and more generally to assess the role of technological change in industry shakeouts. We consider four products that experienced sharp shakeouts and a great deal of technological change, automobiles, tires, televisions, and penicillin. Automobiles and televisions are analyzed in Utterback and Suarez [1993] and tires in Jovanovic and MacDonald [1994]. Penicillin is considered because it represents a quite different technology from the other three products. We collect detailed information for each product concerning the evolution of the industry that developed to produce it and how the product and its production process were improved over time. We rely heavily on lists of product and process innovations developed by others and supplemented by our own efforts, quantitative series on productivity, and qualitative information regarding innovation culled from various sources to reconstruct the history of technological change for each product. The evolution of the market and the technology of each product is compared to the predictions of the theories, and the findings for the four products are used together to reflect on the key premises and predictions of the theories. By concentrating on multiple products that experienced sharp shakeouts and that span various technologies and eras, we anticipated that any general patterns in the way the products evolved would be revealing about the technological determinants of

3 shakeouts. Our findings suggest that shakeouts are not triggered by particular technological developments but are part of an evolutionary process that is driven by continual technological change. Technological innovation apparently contributes to a mounting dominance by some of an industry’s early-entering firms, which eventually makes entry untenable and steadily drives out smaller firms with relatively high costs and low quality. The paper is organized as follows. In Section II, we review the three theories and their implications for entry, exit, and technological change. In Sections III, IV, V, and VI we analyze respectively the history of autos, tires, televisions, and penicillin. Each of these sections is composed of three subsections: an overview of the evolution of the industry, including entry and exit patterns and brief histories of the leading producers; an analysis of product innovation; and an analysis of process innovation. In each subsection the evidence is used to reflect on the theories. In Section VII, the findings for the four products are synthesized to evaluate the key premises and predictions of the theories and the role of technological change in industry shakeouts. In Section VIII, we conclude. 2. Theories of Industry Shakeouts The three theories we consider feature technological change as the prime driver of industry shakeouts. The theories developed by Jovanovic and MacDonald [1994] and Utterback and Suarez [1993] emphasize a particular technological development that triggers a shakeout. They have similar implications regarding entry, exit, and firm survival, but differ in their predictions about technological change. The third theory, developed by Klepper [1996], describes a gradual evolutionary process with contrasting implications regarding entry, exit, firm survival, and technological change. Jovanovic and MacDonald’s model, which we refer to as the innovative gamble model, builds on ideas dating back at least as far as Schumpeter [1911]. While numerous formal models embodying Schumpeter’s ideas about industry evolution have been proposed (cf. Nelson and Winter [1978], Futia [1980], Metcalfe and Gibbons [1988]), to our knowledge Jovanovic and MacDonald’s is the first explicitly to address a

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