Market Evolution

Abstract

Abstract A product market is a dynamic exchange system that evolves over time. The number of competitors, the diversity of product offerings, and the needs of the customer market are in continuous flux. As dynamic systems, product markets exist along a continuum ranging from relatively stable, incremental evolution to frequent and radical change. Market dynamism is driven by interactions between sellers who experiment with products and prices to increase market share and customers who have heterogeneous, changing preferences. Innovation, imitation, economies of scale and scope, and customer preferences play key roles in product market evolution. If innovation is easy to imitate and economies of scale and scope are modest, both innovation and imitation can be profitable and product markets can remain fragmented indefinitely (e.g., restaurants and hair stylists). If innovation is easy to imitate and economies of scale and scope are significant, imitative firms can build scale and scope advantages into dominant positions (e.g., Walmart). However, when entry barriers are low and customers are heterogeneous and variety‐seeking, small innovators can enter stable markets with new offerings (e.g., craft beer breweries). The product life cycle concept is one of the best‐known frameworks for considering product market evolution.