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Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry

  • Guido Buenstorf

    ()

  • Steven Klepper

Beginning in 1922, the rate of exit of U.S. tire producers increased sharply and the industry began a severe and protracted shakeout. Just five years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.

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Paper provided by Philipps University Marburg, Department of Geography in its series Papers on Economics and Evolution with number 2009-15.

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Date of creation: Dec 2009
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Handle: RePEc:esi:evopap:2009-15
Contact details of provider: Postal: Deutschhausstrasse 10, 35032 Marburg
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Web page: http://www.uni-marburg.de/fb19/
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  1. repec:rje:randje:v:37:y:2006:i:4:p:861-886 is not listed on IDEAS
  2. Cohen, Wesley M & Klepper, Steven, 1996. "Firm Size and the Nature of Innovation within Industries: The Case of Process and Product R&D," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 232-43, May.
  3. Peter Thompson & Steven Klepper, 2003. "Submarkets and the Evolution of Market Structure," Working Papers 0303, Florida International University, Department of Economics.
  4. Boyan Jovanovic & Glenn MacDonald, 1993. "The Life-Cycle of a Competitive Industry," NBER Working Papers 4441, National Bureau of Economic Research, Inc.
  5. Utterback, James M. & Suarez, Fernando F., 1993. "Innovation, competition, and industry structure," Research Policy, Elsevier, vol. 22(1), pages 1-21, February.
  6. 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.
  7. Horvath, Michael & Schivardi, Fabiano & Woywode, Michael, 2001. "On industry life-cycles: delay, entry, and shakeout in beer brewing," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1023-1052, July.
  8. Naomi R. Lamoreaux & Kenneth L. Sokoloff (ed.), 2007. "Financing Innovation in the United States, 1870 to Present," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262122898, June.
  9. Steven Klepper, 2002. "Firm Survival and the Evolution of Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 37-61, Spring.
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