Abstract
Many aspects of market structure are embodied in the pattern of similarity between products. This paper studies a similarity network of the movies released in the last decades. The network exhibits substantial clustering and a community structure with large blocks. I develop a structural model for the evolution of the network, in which risk-averse firms make go/no go decisions on candidate movies based on the performance of the past similar movies; candidates are either novel or creative combinations of previous movies. The estimated model is capable of reproducing several important patterns of the data. I use the model to study the tradeoff between innovation and imitation, the causes of large blocks, and the life cycle of blocks. In particular, it is found that large blocks are mainly a result of firm learning rather than risk aversion. I discuss the implications for managers and policy makers.
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