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Dynamics of Entry and Exit of Product Varieties – what evolution dynamics can account for the empirical regularities?

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  • Andersson, Martin

    ()
    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Johansson, Börje

    ()
    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Månsson, Kristofer

    ()
    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

Abstract

Firm-level heterogeneity is substantial even in narrowly defined industries. This paper focuses on formulating evolution dynamics which can account for the observed heterogeneity and its maintenance. Based on examination of data on Swedish firm’ supply pattern to different markets over time, we present a parsimonious model that has the ambition to capture the picture of heterogeneous firms, while accommodating the simultaneous exit and entry of destination varieties in firms’ supply pattern. The model assumes both scale economies of firms and path-dependence, where the latter is manifested in such a way that the arrival rate of innovation ideas to an individual firm is a function of each firm’s stock of varieties at every given point in time. The path-dependence phenomenon is an “explosive” non-linearity, whereas conservation mechanisms include development of demand and exit of established varieties. The described path dependence explains the skewed distribution of varieties across firms, but the question of what keeps the “equilibrium” away from competitive exclusion where only few large firms remain. We make use of simulations to depict and assess the innovation dynamics of the proposed model.

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Bibliographic Info

Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 204.

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Length: 23 pages
Date of creation: 23 Nov 2009
Date of revision:
Handle: RePEc:hhs:cesisp:0204

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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Keywords: innovation; path-dependence; firm-level; heterogeneity; evolution dynamics;

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  1. Martin Andersson & Börje Johansson, 2008. "Innovation Ideas and Regional Characteristics: Product Innovations and Export Entrepreneurship by Firms in Swedish Regions," Growth and Change, Gatton College of Business and Economics, University of Kentucky, vol. 39(2), pages 193-224.
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