Hidden but in Plain Sight: The Role of Scale Adjustment in Industry Dynamics

Sidney Winter, Management, The Wharton School; Thorbjørn Knudsen, University of Southern Denmark; and Daniel Levinthal, Management, The Wharton School

Abstract: While much is understood about the general pattern of industry dynamics, a critical element underlying these dynamics, the rate of the expansion of individual firms, has been largely overlooked. We argue that the rate at which firms can reliably increase their scale of operations is a critical factor in understanding the structure of industries. Further, success at scaling-up the firm’s operations provides a dynamic-isolating mechanism that insulates established firms from new competition. We show that the bases of profitability in the industry (monopoly-like profits stemming from the restriction of output, efficiency rents based on firm-specific productivity differences, or transitory Schumpeterian profits) can be traced to the scale adjustment process. We explore these issues in a computational model of industry dynamics.

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