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Competition and Growth Innovations and Selection in Industry Evolution Jati K. Sengupta Competition and Growth This page intentionally left blank Competition and Growth Innovations and Selection in Industry Evolution Jati K. Sengupta University of California Santa Barbara USA © Jati K. Sengupta 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–4164–5 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Sengupta, Jatikumar. Competition and growth: innovation and selection in industry evolution / Jati K. Sengupta. p. cm. Includes bibliographical references and index. ISBN 1–4039–4164–5 1. Industrial organization (Economic theory) 2. Industries–Technological innovations. 3. Competition. I. Title. HD2326.S43 2005 338—dc22 10 9 8 7 6 5 4 3 2 1 14 13 12 11 10 09 08 07 06 05 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne. 2004053142 For life’s quest for the sacred This page intentionally left blank Contents Preface ix 1 Competition and Growth 1.1 Introduction 1.2 Competition over time 1.3 Efficiency and growth of firms 1.3.1 A two-stage model 1.3.2 Evolution of firms 1.4 Selection process under allocative efficiency 1.5 Technology and market dynamics 1.5.1 Growth efficiency frontier 1.5.2 Innovations and market dominance 1 1 4 6 7 16 20 22 23 30 2 Selection and Evolution of Industry 2.1 Introduction 2.2 Entry and exit processes 2.2.1 Cournot–Nash adjustments 2.2.2 Game-theoretic models 2.3 Barriers to entry 2.4 Positive and negative feedback 2.4.1 Survival of the fittest 36 36 37 42 44 48 52 56 3 Stochastic Selection and Evolution 3.1 Fisherian replicator dynamics 3.2 Schumpeterian innovation processes 3.2.1 A diffusion model 3.2.2 Technical progress and evolutionary adaptation 3.3 Stochastic models of entry 3.3.1 Cost adjustment models of entry 3.3.2 Barriers to entry 71 72 76 78 83 89 95 97 4 Cournot–Nash Selection Process 4.1 Static framework and entry 4.1.1 Genetic evolution and selection 4.2 Dynamic interaction models 4.2.1 Departure from optimality: coexistence vii 100 100 103 107 109 viii Contents 4.3 Models of differential games 4.3.1 Learning-by-doing and scale economies 4.4 Concluding remarks 111 114 118 5 Innovations and Growth 5.1 R&D investment and innovation efficiency 5.2 Core competence and industry evolution 5.3 Capacity expansion and growth 5.4