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

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

62 manufacturers. The

62 manufacturers. The fact that their entry in the 1920s did not alter the structure of the market nor affect the shakeout in tires and that they eventually gravitated to buying from the largest firms suggests that the advantages of the largest tire manufacturers transcended distributional economies. 52 Private label sales were also significant in televisions, and statistical analyses by Datta [1971] and Willard [1982] indicate that marketing-related advantages had little impact on firms’ survival. Thus, the limited evidence available about nontechnological factors suggests that they did not play a key role in the shakeouts of the four products. An alternative way to evaluate the three theories is to ask how well each accords with all seven of the highlighted findings. Readers may wish to refer to Section II as necessary regarding the basis for and predictions of the theories. The innovative gamble theory features a radical technical development that triggers a shakeout. This development comes from outside the industry and involves difficult technical challenges that firms must overcome to remain competitive. Firms unable to adapt to the development exit the industry, while successful innovators expand because the new technology raises the minimum efficient size of firm. Finding 5 indicates, however, that major technical advances with singularly potent competitive effects were rare, and the times when they did occur were not generally around the start of the shakeouts. Furthermore, such advances did not seem to increase the minimum efficient firm size. A case in point is the Banbury Mixer, the innovation singled out by Jovanovic and MacDonald as the cause of the shakeout in tires. The Mixer was readily available through a third-party supplier, and besides diffusing widely, it had quite limited effects on the production process. Moreover, it was judged to reduce, not increase, the minimum efficient size of firm (Nelson [1982]). Given such conclusions, it is not surprising that finding 2 also did not match the theory’s predictions; rather than leveling off as firms unable to adapt to the new technology exited, the number of firms continued to decline for decades after the start of the shakeouts. As for all the theories, finding 1, the cessation of entry, did match the innovative gamble theory’s predictions. Findings 52 Warner [1966, p. 65] makes a similar point regarding distributional economies in tires.

63 3-4 and 6-7 were not directly addressed by the theory. Overall, the evidence suggests that individual radical innovations were not responsible for the shakeouts. Given the enormous technical improvement that occurred in the four products, the innovative gamble theory begs the question of why so few technical advances had sufficient competitive significance to cause sustained exit. With the exception of new types of penicillin, the answer seems to lie in the rapid diffusion of the most important innovations among producers. This diffusion resulted from many factors, three of which seem most salient. First, many significant innovations could be (and were) readily imitated. Some of these innovations were not protected by patents, either because they were not patentable or because patents would reveal valuable knowledge that would facilitate imitation. Others were patented, but the scope of the patents was (eventually) so narrowly defined as to afford little protection from imitation. Major innovations in this first category include the Selden patent on the automobile, the three major advances in tire design, the clincher, straight-side, and balloon tire (and for that matter the pneumatic automobile tire itself), many rubber chemical innovations, penicillin G (the original form of penicillin), and most major process improvements, including the moving assembly line in autos, the core and drum tire building machines, dip soldering and printed circuit boards in televisions, and most of the major advances in the fermentation of penicillin. Second, many significant innovations were developed by suppliers or were developed simultaneously by multiple firms and were subject to competition, which in both instances led to them being widely available through sale. Supplier-developed innovations available for sale include the DELCO electrical system for autos, the Banbury mixer in tires, and fermentation equipment in penicillin, and producer- developed innovations available through sale include the core tire building machine and color television picture tubes. Third, even when significant innovations were effectively protected by patents, with the exception of new forms of penicillin they were generally widely licensed. In autos, the patent agreement in force as of 1915 virtually guaranteed royalty-free licensing. 53 In tires, the two biggest patented advances, the core and drum 53The automobiles patent agreement had an escape clause for major advances, but no advance ever qualified.

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