The Life Cycle of the U. S. Tire Industry

Abstract

1. Introduction A recent literature has emerged focusing on industry evolution, or the dynamic patterns that industries and firms follow as they systematically evolve over time. This literature is important because of the insights provided about how industries change, why they change, and the consequences of industrial change. year 1982 saw three fundamental contributions made to the research on the evolution of industry. Boyan Jovanovic published the first formal model of industry evolution, Richard Nelson and Sidney Winter presented their influential book on the causes and effects of this phenomenon, and Michael Gort and Steven Klepper published their careful analysis of the stages of the product life cycle. Knowledge concerning industry dynamics and industry evolution has expanded since then.' Despite this progress in the field of industry evolution, considerable gaps remain. For example, we lack an adequate empirical understanding of the evolutionary process at the single-industry level from the early to the late stages of its life cycle. Shakeouts have been identified in the literature as an integral component of this evolutionary process. sudden disappearance of large numbers of firms have been documented across a broad spectrum of industries, such as steel, airline carriers, financial intermediaries, automobiles, and tires. An important strand in the literature argues that the catalyst for these shakeouts is the introduction of a new dominant innovation. Confronted by a new technology introduced by a competitor, the inability of other firms to adopt this new dominant technology presumably forces them out of the market. Jovanovic and MacDonald (1994) made a pioneering and parsimonious contribution in this field of research by explaining patterns of number of firms, output, and prices of the U.S. tire industry. Despite the importance of their contribution, we argue that their model does not adequately describe the key historic developments that have taken place in this or many other industries that faced a shakeout of producers.2 domain of relevance of the Jovanovic-MacDonald model is limited. It assumes that one innovation followed by just one refinement is responsible for the nonmonotonicity in firm numbers. This implies that the model is applicable only for those industries having experienced just two technologies in their entire history: an initial low-tech and a subsequent high-tech phase. Most industries, including the automobile tire industry that was the testing ground of Jovanovic and MacDonald, have an ongoing history of significant improvements in product quality and productivity. It seldom occurs that one innovation is dominant. This is certainly true for the tire industry. Nelson (1987), in his study on the U.S. tire industry, observed that there was no single technical breakthrough that unlocked the industry's potential for highspeed production; nor was any individual or firm of overriding importance. advent of mass production was a cumulative process resulting from a vast number of successive small changes (pp. 331-2, italics added). Almost half a century ago, Reynolds (1938, p. 463) described a similar process: The great improvement in tire quality during the past 30 years is undoubtedly due to constant repetition of [the] cycle of invention and imitation. We take a different approach than Jovanovic and MacDonald and explain the nonmonitonicity in firm numbers as resulting from gradual unit cost reduction over time leading to declining profit margins. In the present paper, we relate this cumulative process to the concept of learning-by-doing. We will test the model using data of the American tire industry. We do this to facilitate the comparison between our model and that of Jovanovic and MacDonald and because this industry is one of the few for which data are available for a long time period. process of learning-by-doing leading to decreasing marginal costs over time has an important impact on the number of firms in the industry. …