“Industry Shakeouts: A Cross-Industry Application of Evolutionary Economics.~~

This publication is available in alternative media on request. The Pennsylvania State University is committed to the policy that all persons shall have equal access to programs, facilities, admission, and employment without regard to personal characteristics not related to ability, performance, or qualifications as determined by University policy or by state or federal authorities. The Pennsylvania State University does not discriminate against any person because Summary We propose a testable theoretical rationale for the patterns and processes of industry shakeout in a non-manufacturing service industry. Drawing on evolutionary economics, we suggest that shakeout occurs when there are sufficient incentives for organizational innovation that re-scales an industry, leading to differential firm growth rates and an endogenously determined selection environment. The empirical results, which are based on data collected from 501 executives in 54 different wholesale distribution industries, document the dual impact of demand-reducing substitution effects and the hypothesized endogenous evolutionary forces. Our empirical analyses also demonstrate heterogenous processes of industry shakeout occurring across different industry value chains. Despite research that has advanced our empirical understanding ofindustry evolution, we still know little about the processes by which market structure evolves in non-manufacturing service industries. The product classes studied in cross-industry shakeout studies often show little kinship to one another, comparing manufacturers in product classes as diverse as shampoo, automobile tires, and guided missiles (Klepper and Graddy 1990) or automobiles, typewriters, and integrated circuits (Utterback and Suarez 1993). Such non-comparability makes it difficult to go beyond overly general explanations for shakeouts. These empirical studies also study distant historical periods, limiting our ability to evaluate theories of industry evolution orto interact with the companies and managers undergoing a shakeout. This paper addresses these limitations by examining the dramatic shakeouts that have been occurring in wholesale channels ofdistribution throughout the US economy. A wholesaler-distributor is a non-manufacturing company that sells products to retailers, merchants, contractors, and/or industrial, institutional, and commercial users, but does not sell in significant amounts to ultimate consumers (Stern and EI-Ansary 1992). Total 1997 revenues ofwholesaler-distributors were approximately $2.5 trillion, making this an important but understudied component ofindustry value chains (Porter 1985). One recent study found that the number ofwholesalers has declined by as much as 75% in some industries (Fein 1997). These shakeouts parallel the patterns documented for manufacturing industries (Klepper 1 996a). Despite dramatic shakeouts in wholesale industries such as periodicals and pharmaceuticals, a few industry channels have experienced little …