Explaining The Shakeout Process: A 'Successive Submarkets' Model

Jian Tong

Economic Journal, 2009, vol. 119, issue 537, pages 950-975

Abstract: 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. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Date: 2009

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