7. How do patterns of industrial organization change as industries mature?

What
happens to the pace of innovation in an industry as it matures?
In economics, industrial organization is a field that builds on the theory of the firm by
examining the structure of (and, therefore, the boundaries between) firms and markets.
Industrial organization adds real-world complications to the perfectly competitive model,
complications such as transaction costs,[1] limited information, and barriers to entry of new
firms that may be associated with imperfect competition. It analyzes determinants of firm and
market organization and behavior as between competition[2] and monopoly,[3] including from
government actions. Industrial Organization is the economic field that studies the
strategic behaviour of firms, and their interaction to determine the structure of
markets.
An industry is a complex system with open to environment. As industry mature, new
connections are established and the change in the industrial organization can lead to the
establishment of new connection. Different ideas about the patter of industrial organization as
industries mature.
Schumpeter:
From Schumpeters point of view, technical progress comes from a process of creative
destruction, in which innovations make prior technology out-dated and originate from the
innovative entrepreneur. Monopolies have a positive consideration, as they carry out the
function of promoting innovation and investments, and government intervention should
guarantee both of these. Monopoly power is likely to be short lived as competition is based
on technological superiorty as well as price an on going process of creative destruction. He
argues that technological innovation often creates temporary monopolies, allowing abnormal
profits that would soon be competed away by rivals and imitators. These temporary
monopolies were necessary to provide the incentive for firms to develop new products and
processes http://www.policonomics.com/industrial-organization/

Burton Kleins view (Dynamic Economics, 1977)

_A lot of entry and exit as firms experiment aggressively in the hope of getting the rewards of
becoming a major player
_ Industries tend to evolve into oligopolies that are much less innovative they can readily
copy each others innovations so instead they concentrate on increasing productivity,
increasing organizational capability at the expsense of innovation capability
_Major change comes from outside, if it occurs
Along with the change in the structure of the market, the market institution also changes as
industries mature. Rise of trade association that help create industrial standards and lobby
governments for protection and other helpful policies. Rise of specialized trade press,
industrial exhibitions and congresses: spread of knowledge, signaling to rivals and
consumers. Rise of comparison websites, product reviews that assist customers, adding to
competitive pressure. Rise of market intermediaries.
Pace of innovation in an industry as it matures:
Why need innovation: Evolutionary economists do not see firms as having much scope for
achieving a state of rest. Competition is a dynamic process involving the rise and fall both of
products and firms. Firms make innovation to survive and to become market leader in the
market.
Innovation does not just cover basic and applied research, but also includes product
development, production, marketing, distribution and even product adaptations and
improvements. There are radical and incremental innovations. Radical innovation exploit new
technology, focus on processes, products or services with unprecedented performance feature,
create dramatic changes that transform existing market or create new one. Incremental
innovation exploit existing technology, focus on cost or feature improvement in existing
products or services, improve competitiveness within current market of industries.
Stage 1: A new industry is born when someone introduces new knowledge in the form of a
product that has not been seen before. The introduc1on of this brand new product is an
example of radical innovation. At this stage production systems need to be flexible because of
uncertainty about technologies and customer acceptance.

Stage 2: Emergence of a dominant design -- a product which embodies a particular

combination of features and technologies in such a way that it meets consumer wants/needs
in a relavtively complete manner.
Stage 3: reduction in the number of radical product innovation in the industry in favour of
performance enhancing incremental product innovations.At this stage, Produc1on systems
have less need for flexibility and as sales start depending more on offering a compe11ve
product rather than getting the basic concept right, keeping production costs down becomes
more important investment in more specialized machinery.
Concentration on developing cost effectiveness routine and maintain a stable organizational
environments in which to implement them. In the specific phase, an industry has entered its
maturity phase and the value of the quality / cost ratio becomes the basis for competition.
Innovations to the product are incremental, while improvements to quality and productivity
are cumulative. Any modification to either process or product is both difficult and costly.
Processes are automated and generally make use of specialized equipment. The
organizational structure is based upon clearly defined tasks and procedures. There are few
companies, producing standardized or slightly differentiated products, or commodities, which
enjoy stable sales and market shares (oligopolies). The pace of innovation, whether for the
process or the product, tends towards zero.