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The Market Evolution and Sales Take-Off of Product Innovations

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Author Info
Agarwal, Rajshree (U of Illinois at Urbana-Champaign)
Bayus, Barry L. (U of North Carolina)
Abstract

In contrast to the prevailing supply-side explanation that price decreases are the key driver of a sales take-off, we argue that outward shifting supply and demand curves lead to market take-off. Our fundamental idea is that sales in new markets are initially low since the first commercialized forms of new innovations are primitive. Then, as new firms enter, actual and perceived product quality improves (and prices possibly drop) which leads to a take-off in sales. To provide empirical evidence for this explanation, we explore the relationship between take-off times, price decreases, and firm entry for a sample of consumer and industrial product innovations commercialized in the US over the past 150 years. Based on a proportional hazards analysis of take-off times, we find that new firm entry dominates other factors in explaining observed sales take-off times. We also find no evidence that price mediates the relationship between firm entry and take-off time. We interpret these results as supporting the idea that demand shifts during the early evolution of a new market due to non-price factors is the key driver of a sales take-off.

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Paper provided by University of Illinois at Urbana-Champaign, College of Business in its series Working Papers with number 02-0104.

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Date of creation: Jan 2002
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Handle: RePEc:ecl:illbus:02-0104

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Gort, Michael & Konakayama, Akira, 1982. "A Model of Diffusion in the Production of an Innovation," American Economic Review, American Economic Association, vol. 72(5), pages 1111-20, December. [Downloadable!] (restricted)
  2. Griliches, Zvi, 1990. "Patent Statistics as Economic Indicators: A Survey," Journal of Economic Literature, American Economic Association, vol. 28(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  3. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-47, April. [Downloadable!] (restricted)
    Other versions:
  4. Bass, Frank M, 1980. "The Relationship between Diffusion Rates, Experience Curves, and Demand Elasticities for Consumer Durable Technological Innovations," Journal of Business, University of Chicago Press, vol. 53(3), pages S51-67, July. [Downloadable!] (restricted)
  5. Klepper, Steven & Simons, Kenneth L, 1997. "Technological Extinctions of Industrial Firms: An Inquiry into Their Nature and Causes," Industrial and Corporate Change, Oxford University Press, vol. 6(2), pages 379-460, March.
  6. Agarwal, Rajshree, 1998. "Evolutionary trends of industry variables," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 511-525, July. [Downloadable!] (restricted)
  7. John R. Hauser, 1977. "Testing the Accuracy," Discussion Papers 286, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  8. Nina Shapiro, 1986. "Innovation, New Industries and New Firms," Eastern Economic Journal, Eastern Economic Association, vol. 12(1), pages 27-43, Jan-Mar. [Downloadable!]
  9. repec:fth:harver:1473 is not listed on IDEAS
  10. Agarwal, Rajshree & Gort, Michael, 1996. "The Evolution of Markets and Entry, Exit and Survival of Firms," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 489-98, August. [Downloadable!] (restricted)
  11. Klepper, Steven, 1997. "Industry Life Cycles," Industrial and Corporate Change, Oxford University Press, vol. 6(1), pages 145-81.
  12. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June. [Downloadable!] (restricted)
  13. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September. [Downloadable!] (restricted)
  14. Steven Klepper & Kenneth L. Simons, 2000. "The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 728-760, August. [Downloadable!] (restricted)
  15. Stoneman, P & Ireland, N J, 1983. "The Role of Supply Factors in the Diffusion of New Process Technology," Economic Journal, Royal Economic Society, vol. 93(369a), pages 66-78, Supplemen. [Downloadable!] (restricted)
  16. Steven Klepper & Elizabeth Graddy, 1990. "The Evolution of New Industries and the Determinants of Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 27-44, Spring. [Downloadable!] (restricted)
  17. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December. [Downloadable!] (restricted)
  18. Russell, Thomas, 1980. "Comments on "The Relationship between Diffusion Rates, Experience Curves, and Demand Elasticities for Consumer Durable Technological Innovations."," Journal of Business, University of Chicago Press, vol. 53(3), pages S69-73, July. [Downloadable!] (restricted)
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  1. Andrew Burke & Holger Görg & Aoife Hanley, 2008. "The impact of foreign direct investment on new firm survival in the UK: evidence for static versus dynamic industries," Small Business Economics, Springer, vol. 31(4), pages 395-407, December. [Downloadable!] (restricted)
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