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The Decline of Dominant Firms, 1905–1929

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  • Richard E. Caves
  • Michael Fortunato
  • Pankaj Ghemawat

Abstract

The theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share. We extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share. The model is applied to 42 once-dominant firms in U. S. manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905–1929. The statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing.

Suggested Citation

  • Richard E. Caves & Michael Fortunato & Pankaj Ghemawat, 1984. "The Decline of Dominant Firms, 1905–1929," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(3), pages 523-546.
    • Handle: RePEc:oup:qjecon:v:99:y:1984:i:3:p:523-546.
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    File URL: http://hdl.handle.net/10.2307/1885963
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    Cited by:

    1. Chu, Hsiao-Ping & Yeh, Ming-Liang & Sher, Peter J. & Chiu, Yi-Chia, 2007. "Will the leading firm continue to dominate the market in the Taiwan notebook industry?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(2), pages 473-479.
    2. Rajat Mishra & Randy Napier & Mahmut Yasar, 2019. "Do competitors respond to capacity changes? Evidence from U.S. manufacturers," Operations Management Research, Springer, vol. 12(3), pages 159-172, December.
    3. Khalil Assala & Suela Bylykbashi & Gilles Roehrich, 2021. "How To Measure Competitive Intensity?," Post-Print hal-03381232, HAL.
    4. Lalit Manral & Kathryn R. Harrigan, 2023. "Geographic fragmentation and declining dominance: Yet another story of AT&T’s decline in the post-divestiture era," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 605-644, April.

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