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

Martin Andersson, Börje Johansson and Kristofer Månsson ()

No 204, Working Paper Series in Economics and Institutions of Innovation from Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

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.

Keywords: innovation; path-dependence; firm-level; heterogeneity; evolution dynamics (search for similar items in EconPapers)
JEL-codes: C16 F14 L25 O33 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2009-11-23
New Economics Papers: this item is included in nep-com, nep-ent, nep-ind, nep-ino, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:cesisp:0204

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