Industrial Dynamics

• Industrial dynamics seeks to understand how industries emerge, grow, and decline.
• Innovation's role in the origin, transformation, and evolution of industries is important.
• These questions about industrial dynamics were posed by A. Marshall, J. Schumpeter, and S. Kuznets.
• The modern industrial economics has only recently started addressing these important questions.

Static Approaches to Studying Industries

• Research lines are important factors
• Research from the 1950s and 1960s modeled structure-conduct-performance.
• Exogenous basic conditions imply market structure, which implies behavior of buyers/sellers, which implies industry performance.
• Game theory and new industrial economics shifted the research focus to firms' strategies as a rational response to other firms' expected behavior.

Dynamic Approaches to Studying Industries

• Since the late 1970s/early 1980s, evolutionary models have been used to study industries.
• The evolutionary models are characterized by:
• the central role of innovation and technological change
• limited rationality of actors
• firm learning processes
• firms using a "trial and error" approach to decisions without maximization
• The dynamic approach led to theoretical/empirical research on innovation and industry evolution.

Industry Life Cycle (ILC)

• The literature on ILC attempts to find and explain regularities in how new industries emerge and evolve.
• An industry is a set of firms.
• Firms are grouped into industries because they:
• produce the same good (e.g., soft drinks)
• satisfy the same consumer need (e.g., transport)
• use the same raw material (e.g., chemical and rubber industry)
• Defining the boundaries of an industry can be difficult.
• Is train and air transportation the same industry?
• The wider the boundaries, the less influence one firm has on others.
• AirFrance VS Vueling or AirFrance VS SNCF

Examples of Industries

• Pharmaceutical industry with a role of basic research
• Music Industry with streaming models
• Photography industry including film
• Polaroid and Kodak

Regularities Related to Industry Life Cycle (ILC)

• Entry patterns:
• Are entering firms small or large initially?
• How does the entry rate change over time (accelerate, decelerate, constant)?
• Exit patterns:
• Are exiting firms small or large, old or young?
• When firms leave the industry
• Does exit happen slowly or via a shake-out?
• Number of firms: Does this number change over time?
• Innovation:
• What's the relationship between innovation / entry and exit of firms?
• Is innovation a barrier to entry?
• Do entrants innovate less or more than incumbents?
• How do the characteristics of innovation change over time?
• Product vs Process and Radical vs Incremental

Origins of ILC Literature

• Management and particularly Marketing
• The Product life cycle literature treats an industry as a single product (PLC, typically a new product)
• The trend of innovation, costs, demand, and market concentration is needed to advise companies on business strategies
• Found in "Innovation, Competition, and Industry Structure" Research Policy 22(1):1–21 by Utterback, James M. and Fernando F. Suárez in 1993.
• Research in evolutionary economics emphasizes regularities in firm entry, growth, and decline, explained by innovation and selection.
• Found in “Industry Life Cycles" Industrial and Corporate Change 6(1):145–182 by Klepper, Steven in 1997
• Both approaches owe much to Schumpeter's writings.
• Schumpeter MARK1: the role of the entrepreneur who uses creative destruction.
• Schumpeter MARK2: the role of big firms and their R&D.

Empirical Study

• Growth declines in the 1920s due to a decrease in first-time car buyers
• Graph shows the number of automobiles produced in census years from 1899-1937.

ILC-REGULARITIES: ENTRY/EXIT/NR.FIRMS in US Automobile Producers from 1896-1966

• Stage 1: Growth in entry
• Stage 2: Peak in firms
• Stage 3: Shakeout
• Stage 4: Stability, almost no exit or entry
• Refer to Ken Simons’ lecture notes on “Industrial Growth and
• entry>exit
• entry=exit
• Exit>entry

ILC Regularities: Increasing Concentration

• Ford and GM held leading positions since 1907.
• Combined market share of the top two leaders increased steadily after 1907.
• The market share rose to over 50% in 1913 and over 60% in 1919.
• By 1937, the top three firms (GM, Ford, Chrysler) accounted for 88% of automobile sales.
• Chrysler was established in 1925, succeeding Maxwell Motors.

ILC-REGULARITIES: EXIT by AGE (COHORT)

• Long-term survivors are usually in the 1st entry cohort.
• The chance of survival decreases in later cohorts.
• The first two cohorts contain approximately the same number of firms as the last three cohorts.

Trends in Mature Industries

• Initially:
• the output grew rapidly
• many firms entered the industry
• firm market shares were volatile
• production processes were loosely organized
• product innovation was fundamental
• Later on:
• entry slowed and then became negligible
• the number of firms declined with a sharp shakeout
• firm market stabilizes
• output growth slowed
• product innovation declined
• process innovation rose
• production processes became more mechanized
• Companies that dominate are often the first entrants; otherwise called first mover advantage.
• Higher rates of survival occur in the first entrants
• Foreign Automotive industries' studies show a similar evolution to the American Auto Industry
• Carroll et Hannan, 1995

Trends in In Product Innovation

• Product innovation peaked early around 1905
• World War II caused product innovation to trend downward
• Figure notes a transilience score from 1 to 7 which reflects the impacts on the production process

Trends in Process Innovation

• Process innovation was upward from start of industry to the mid 1930's
• Process innovation decreased sharply after World War II

ILC Regularities: Process Innovation

• Process innovations appear after product innovations and continue throughout the industry life cycle
• It's hard to separate effects of learning (learning by doing) with economies of scale
• Process innovations are a characteristic of large firms
• Large firms entered first and had longer experience
• Large firms have higher cumulated production, lower average production costs, and lower prices
• Large firms produce more output, lower average production costs, and lower prices, and increase demand and market shares for large firms

Other Industries Compliant with ILC

• Tyre/Tire Industry
• Television industry

Industries with Alternative ILC

• These challenges rely on the learning by doing process and that leading firms have no advantage
• No Shakeout Industries occurs
• Explanation 1: No early-mover advantage.
• Mechanical to electronic calculators
• Revival of entry in the US car industry with fuel-efficient Japanese and European cars after the oil crisis.
• Explanation 2: The innovation process is not the key competitive lever.
• Specialized suppliers of technology emerged, such as in chemicals.
• 3 groups are alternative ILC

Trends in Industries with Alternative Life Cycles

• First group: typical dynamic occurs. 20 to 30 years after a new industry emerges, some firms specialize in development of new production processes, methods, and equipment.
• R&D is done not inside these companies but is done to provide to incumbents with leading production technologies
• Petrolchimicals -styrene, where engineering firms specialize in developing new processes and supply final chemical producers with chemical process patents.
• Zippers industry specializes in specializing in assembly of zipper parts that responds to limits of the production during WW2, has no process innovation but late entry of specialized firms.
• Second group: industry is characterized by a division of labor between technical specialists and marketing/manufacturing firms
• Technical firms specialize in product innovation and are the initial innovators
• Manufacturing and marketing specialists enter later
• Automatic teller machines (ATMs) were commercialized by new companies and experienced firms selling related products for banks entered after the market grew
• Third group: specialization is based on product submarkets, and firms differ in mix of submarkets supplied
• buyers of business jets differ in many characteristics, aircrafts are designed to comply with needs, and firms generally offer one or few aircraft types
• businesses have yet to have a shakeout
• Ball-Point Pens, and Phonograph Records have no shake-out industries.