Increasing returns and network structure in the evolutionary dynamics of industries

The paper explores the idea that properties at the level of firms coevolve with more aggregate properties at the level of market institutions in the dynamics of industries. We propose that the structure of network of vertical relations limits the effect of increasing returns at the firm level. The paper develops a set of empirical measures and discusses a detailed case study of the commercial jet engine industry. The analysis of the structural dynamics of the network of vertical relations between engine suppliers and airframe manufacturers during the history of the industry (1958-1997) explains a final configuration of the industry marked by the coexistence of increasing returns to investments in R&D and marketing activities, with an intense competition among a few large incumbents, a low level of concentration and a strong instability of market shares. The emergence of a hierarchical network with a core and a periphery leads to equalisation of technical and market opportunities within the core and prevents incumbents to exit the industry.