WHAT THIS BOOK IS ABOUT

This book is about technological progress and its relationships with competition and the evolution of industry structures. It presents a new approach to the analysis of these issues, which we have labeled “history-friendly” modeling. This research stream began more than a decade ago and various papers have been published over the years. Here, we build on those initial efforts to develop a comprehensive and integrated framework for a systematic analysis of innovation and industry evolution.

The relationships among technological change, competition and industry evolution are old and central questions in industrial economics and the economics of innovation, a subject matter that dates back to Marshall and of course to Schumpeter. We authors are indeed Schumpeterians in that we believe the hallmark feature of modern capitalism is that it induces, even compels, firms to be innovative in industries where technological opportunities exist and customers are responsive to new or improved products. The evolution of these industries – like computers or semiconductors – is often characterized by the emergence of a monopolist or of a few dominant firms. The speed at which concentration develops varies drastically, however, across sectors and over time, and, often, monopoly power is not durable. In other significant industries – e.g. pharmaceuticals – no firm actually succeeded in achieving such an undisputed leadership. In some cases, the characteristic drift toward concentration is interrupted by significant exogenous change, such as new technologies appearing from outside the sector.

Long ago, Schumpeter proposed that the turning-over of industrial leadership was a common feature in industries where technological innovation was an important vehicle of competition. In recent years economists studying technological change have come to recognize a number of other important connections between the evolution of technologies and the dynamics of industries’ structure. Progress in this area has come from different sources. The availability of large longitudinal databases at a very high level of disaggregation has allowed researchers to unveil robust stylized facts in industrial dynamics and to conduct thorough statistical analyses, which show strong inter-industry regularities, but also deep and persistent heterogeneity across and within industries. New sophisticated models have been created that attempt to explain the regularities.