Returns to Specialization, Transaction Costs, and the Dynamics of Industry Evolution
AbstractWhen more than one component or activity is needed to produce the final product, a firm may use proprietary standards or adopt a common standard to integrate these components. We call these closed and open firms respectively, and develop a model of industry evolution to study the process by which type of firm comes to dominate the industry. Our simulations show that an industry may diverge from its long run equilibrium configuration for sustained periods of time. Typically, the industry is dominated by closed firms in the early history and by open firms later on. Entry and exit dynamics create transient biases in favor of open firms. First, a closed entrant can capture multiple profits whereas an open entrant faces a lower entry barrier. However, while the odds of closed entry (relative to open entry) are initially greater than one, they decrease with price and eventually open entry becomes more likely than closed entry. Second, though initially closed firms can offset losses in one component with profits from another and thereby have better survival as compared to open firms, when prices fall below a threshold level, a closed firm is more likely to exit than a comparable pair of open firms. Finally, entry by an open firm improves the relative odds of entry by a complementary open firm, especially when the two complementary sectors differ in size or efficiency.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 9606002.
Length: 22 pages
Date of creation: 29 Jun 1996
Date of revision: 01 Jul 1996
Note: Type of Document - PDF; pages:22 ; figures: included. Document submitted in pdf. Prepared on EXP V5, LaTex Type set.
Contact details of provider:
Web page: http://18.104.22.168
Vertical Integration; Externalities; Positive Feedback; Industry Evolution; Transaction Costs; Simulation Models;
Find related papers by JEL classification:
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
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.:
- Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
- David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-37, May.
- 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.
- Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- Timothy F. Bresnahan & Franco Malerba, 1997. "Industrial Dynamics and the Evolution of Firms' and Nations' Competitive Capabilities in the World Computer Industry," Working Papers 97030, Stanford University, Department of Economics.
- Joseph Farrell & Hunter K. Monroe & Garth Saloner, 1998. "The Vertical Organization of Industry: Systems Competition versus Component Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(2), pages 143-182, 06.
- Suma Athreye, 1997. "On Markets in Knowledge," Journal of Management and Governance, Springer, vol. 1(2), pages 231-253, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.