Explaining The Shakeout Process: A ‘Successive Submarkets’ Model

This article explains contemporaneous exit and entry in a new industry with a diffusion process across submarkets. It allows a re‐interpretation of the shakeout process in some industries in a novel way. The industry is a collection of initially inactive independent submarkets; the timing of their activation is determined by an exogenous aggregate diffusion process. New submarket opening attracts new entry. However, the post‐entry endogenous sunk investment requirement induced by innovations also forces much exit to follow entry. The aggregate market thus has overlapping exit and entry; and has a shakeout if the aggregate diffusion process follows a typical S‐shape.