Michael Gort

Time Paths in the Diffusion of Product Innovations

This study attempts to measure and analyse the diffusion of product innovations. Diffusion is defined as the spread in the number of producers engaged in manufacturing a new product. Thus, the term refers to the net entry rate in the market for a new product. We trace the history of diffusion for 46 new products and examine the inter-relations among diffusion, other aspects of technological change, price, output, and certain attributes of the relevant markets. To explain the 46 product histories, we construct a theory of the development of industries for new products. Our theory combines elements of traditional, neoclassical models with what Nelson and Winter (I974) have termed an evolutionary theory. A novel feature is that the historical sequence, or time path, of events is viewed as a critical determinant of the ultimate structure of new product markets. Thus the time path of events determines not only the course traversed in reaching the end result but the ultimate market structure itself. The paper is organised in four sections. In Section I we present our theory. In Section II we construct a series of alternative theories of the development of industries for new products based on approaches to be found in received literature. The evidence from the 46 new product histories is examined in Section III. Finally, a brief summary of principal findings follows in Section IV.

An Economic Disturbance Theory of Mergers

Introduction, 624. — Economic disturbances and valuation discrepancies, 626. — Pursuit of monopoly and economies of scale as determinants of merger, 629. — Statistical tests, 631. — Security prices and valuation discrepancies, 637.

The Evolution of Markets and Entry, Exit and Survival of Firms

This paper examines entry, exit, and the survival of firms in terms of evolutionary changes in the market from the first introduction of a product to maturity of the market. It is shown that both entry and exit rates depend systematically on the stage of development of the market in the cycle from birth to maturity. Survival rates depend both on stage of development and on individual firm attributes. The empirical work is carried out with data for twenty-five new products. A complete inventory of entering, exiting, and surviving firms from the birth of a new product to its maturity is developed. Copyright 1996 by MIT Press.

Decomposing Learning by Doing in New Plants

The paper examines learning by doing in the context of a production function in which the other arguments are labor, human capital, physical capital, and vintage as a proxy for embodied technical change in physical capital. Learning is further decomposed into organization learning, capital learning, and manual task learning. The model is tested with time-series and cross-section data for various samples of up to 2,150 plants over a 14-year period.

The Evolution of Technologies and Investment in Innovation

The proposition that old knowledge is an input in the production of new knowledge is, itself, old knowledge. In a general sense, we all know that current innovations derive partly from past innovations and will, themselves, influence future ones. But within a technology, is there a time-dependent pattern to innovations? More specifically, do the characteristics of innovations change systematically when compared to those that precede or follow them? And are returns to investment in innovation and the consequent level of such investment dependent, in a consistent way, on the location of innovative effort in the evolution of a technology? Our analysis is partly motivated by an unresolved controversy in the economic literature between what may be characterised as the Kuznets and the Schmookler views of technical change. It may, therefore, be helpful to review briefly the content of this debate. Kuznets (I 930) and Burns (I 934), and later Salter (i 960) among others, saw technological opportunities as declining over the life cycle of a new product or industry. Each new technology is limited in the extent to which it can be developed and the most promising opportunities for development are exploited first. Both Kuznets and Burns explained the eventual decline in the growth in output of new industries by a decline in the rate of technical change as a given technology matures. Kuznets stressed the role of price-reducing changes in production processes as a force generating growth in output. A reduction in the rate of such change, he argued, leads to a decline in the (negative) rate of change of the relative price of a new product, and a consequent decline in the rate of growth of its output. A parallel argument can be made for quality-enhancing product innovations which contribute to the growth in demand for a new product. As opportunities for the most important quality improvements are exhausted, the growth rate in demand declines and the industry gradually approaches obsolescence as newer technologies emerge. At the macroeconomic level, it follows that both the rate of change in productivity and the growth of the economy depend upon the combination of new versus old industries that account for aggregate output. This view of the evolution of technologies has been sharply criticised by Schmookler (I966). Given the cost required to produce an innovation, the profitability it contributes increases with market size. The larger the demand, the greater is the revenue collected from a new product or, alternatively, the larger is the aggregate cost saving from a superior production process. It follows, ceteris paribus, that a larger market leads to an increase in investment in inno-

The Substitution of Capital for Capital

A LTHOUGH homogeneous capital stocks remain a frequent construct in growth theory and the literature on production relations, economists have not missed the fact that trucks are not lathes. Thus considerable effort has gone into specifying the conditions under which aggregation is conceptually permissible.1 Recently, the aggregation of capital services from diverse capital stocks has become an important consideration in the explanation of productivity change for the American economy. Jorgenson and Griliches 2 note the rise in the ratio of equipment stocks to structures stocks over the period 1945-1965. They employ the presumed increase in aggregate capital services from the use of relatively shorter lived assets to explain about 25 per cent of the residual change in the measure of total factor productivity. But very little has been done thus far to identify those variables that exert major influences on changes in the composition of capital goods.3 This paper is directed toward a remedy for this deficiency. In assessing shifts in composition, we have two principal objectives. First, to determine (through the use of an investment matrix) the extent to which changes in the composition of aggregate investment arise from differential industry investment rates as distinct from changes in the coefficients of the matrix itself. Second, to ascertain the determinants of the shifts in aggregate investment, particularly the ratio of equipment to structures. We shall show that the relative prices of capital goods have not been among the principal determinants of such substitution. The theory and estimates of this paper ascribe the changes in composition to variations in the relative costs of capital and labor and to the shift of investment in times of capacity expansion toward new plants with higher ratios of structures to equipment outlays than those for existing plants.

Decomposing Technical Change

A production function is specified with human capital as a separate argument and with embodied technical change proxied by a variable that measures the average vintage of the stock of capital. The coefficients of this production function are estimated with cross section data for roughly 2,150 new manufacturing plants in 41 industries, and for subsets of this sample. The question of interactions between new investment and initial endowments of capital is then examined with data for roughly 1,400 old plants in 15 industries.

Economies of Scale and Natural Monopoly in the U.S. Local Telephone Industry

This paper shows that firm-specific economies of scaleor net overall economiesare correlated with subadditivity. Both economies of scale and subadditivity are a decreasing function of firm size. Most firms are observed to be in the relatively flat portion of the long-run average cost curve, with pronounced economies of scale observable only at the low end of the scale. Economies of scope, as reflected in cost complementarities, do not appear to be a source of subadditivity. The results are estimated using translog total cost functions, and the fact that these cost functions include arguments for the quality of capital and of labor represents an innovation in methodology.

Foresight and Public Utility Regulation

The paper develops a model that shows the effects of rational expectations, and of efficient markets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters the consequences of regulatory decisions. The analysis examines the effects of a deviation between the allowed rate of return and the cost of capital, with both perfect and imperfect investor foresight. It also assesses the consequences of differing expected growth rates. Conclusions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives.

Competition versus Planned Specialization in the Development of Resources for Research in Industrial Organization

There are two distinct problems: (a) the organization and retrieval of received knowledge; (b) the use of resources for the creation of new knowledge. Insofar as industrial organization is concerned, (a) presents no serious problems in the sense that the literature, which consists primarily of journal articles, is not so voluminous as to be beyond the storage and acquisition capacities of any good research library. On the other hand, (b) does present a serious problem, in that the sources of information are highly diverse and what information will prove useful is difficult to predict. The problem of diversity is accentuated by the expectation that industrial organization research will increasingly focus on data at the level of the firm or enterprise.