The great industry gamble: market structure dynamics as a survival contest

Abstract

Industry dynamics are studied as an endogenous tournament with infinite horizon and stochastic entry. In each period, firms’ investments determine their probability of surviving into the next period. This generates a survival contest, which fuels market structure dynamics, while the evolution of market structure constantly redefines the contest. More concentrated markets endogenously generate less profit, rivals that are more difficult to outlive, and more entry. The unique steady‐state distribution exhibits ongoing turbulence, correlated exit and entry rates, and shakeouts. The model’s predictions fit empirical findings in markets where firms trade off profits for smaller risk of failure (e.g., banking).

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