| Firm numbers and industry GDP initially rise and later fall as an industry evolves. This nonmonotomcity is explained as a competitive equilibrium outcome driven by the dynamic interaction between technology progress and demand diffusion. When a new product is introduced, high-income consumers tend to adopt it first. The price then falls with cumulative output and demand grows as the product penetrates into lower-income groups. Eventually fewer new adopters are available and the number of firms starts to decline as market demand turns inelastic. It is shown that faster technology progress, higher mean income or larger market size contributes to faster demand diffusion and earlier industry shakeout. Empirical studies on US and UK television industry as well as a dozen other US industries show that the model well explains the patterns of industrial evolution across countries and products. |
