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Hidden but in plain sight: The role of scale adjustment in industry dynamics
Author(s) -
Knudsen Thorbjørn,
Levinthal Daniel A.,
Winter Sidney G.
Publication year - 2014
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.2197
Subject(s) - profitability index , industrial organization , economic rent , competition (biology) , economics , monopoly , economies of scale , microeconomics , scale (ratio) , process (computing) , productivity , dynamics (music) , computer science , macroeconomics , physics , quantum mechanics , acoustics , biology , operating system , ecology , finance
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 . Copyright © 2013 John Wiley & Sons, Ltd.