Get access

OPEN VERSUS CLOSED FIRMS AND THE DYNAMICS OF INDUSTRY EVOLUTION

Authors


  • *Earlier drafts of this paper were circulated with the working title, ‘Returns to Specialization, Transaction Costs and the Dynamics of Industry Evolution.’ We have benefited greatly from detailed comments and advice from anonymous reviewers and Pierre Régibeau, the reviewing editor. We also thank Marty Gaynor, Steve Klepper, Richard Nelson and Lowell Taylor for helpful comments on an earlier draft. The usual disclaimers apply. Authors listed in alphabetical order.

Abstract

We develop a model of industry evolution in which firms choose proprietary standards (closed firm) or adopt a common standard (open firm). A closed entrant can capture multiple profits whereas an open entrant faces lower entry barriers: The odds of closed entry (relative to open entry) decrease with price and eventually open entry becomes more likely. While initially closed firms have better survival because they can offset losses in one component with profits from another, the situation is reversed when prices fall below a threshold. These entry and exit dynamics can lead the industry away from its long run equilibrium.

Ancillary