KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Dynamics of Entry and Exit of Product Varieties – what evolution dynamics can account for the empirical regularities?
(), Börje Johansson
() and Kristofer Månsson
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; (follow links to similar papers)
JEL-Codes: C16; F14; L25; O33; (follow links to similar papers)
23 pages, November 23, 2009
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