Industry Evolution under Entry Barriers

The evolution of industry depends on the selection mechanism, that is the process of entry and exit of firms and the various factors influencing the entry-exit decisions. Two major factors are most important in the selection processes. One is the evolutionary perspective which emphasizes the firm’s ability through strong increasing returns to scale to alter the market structure significantly. Following the Schumpeterian theory of innovations the main source of such increasing returns is the cumulative aspect of such innovations. Secondly, firms differ significantly in their commitment and ability to innovate. Thus innovations in products and processes are largely endogenous to the firm through R&D investment and learning by doing. Thus vigorous innovation has been found to generate more competitive market structures, while innovations requiring large investment generally involve more concentrated market structures. Thus Klepper (1996) and others have shown that innovations could lead to increased concentration if successful innovators rise to market dominance by causing the MES of production to grow more rapidly than demand.