On industry life-cycles: delay, entry, and shakeout in beer brewing

Abstract

This paper proposes a new explanation for industry ‘shakeout’, an event evident in the life-cycle of many industries in which the number of firms drops significantly in a short interval of time. Based on an in-depth analysis of the shakeout in the United States beer brewing industry between 1880 and 1890, we propose that industry shakeouts naturally follow periods of mass-entry by firms. Similar patterns are evident in two other industries we briefly examine: the US automobile and tire industries. While entry rates fluctuate broadly in all these industries, we find that the timing of exit for a given cohort of entrants is remarkably similar over time: the exit hazard rate is peaked in the first two years of every cohort’s life and drops dramatically to low and stable levels for subsequent ages. In this sense, mass-exit follows mass-entry and does not require a deep explanation. It is the mass-entry evident in the data for these industries that requires an explanation. We propose a theoretical model of information accumulation to explain entry into an industry. Entrepreneurs are uncertain about the profitability of the industry and this uncertainty is resolved through sufficient accumulation of information regarding the fortunes of incumbent firms. Delay in entry occurs solely due to the fact that it takes time to accumulate sufficient information to support more entry. The resulting entry pattern from simulations of the model looks much like that observed in the industries we study.