Submarkets and the Evolution of Market Structure

We construct a model of industry evolution in which the central force for change is the creation and destruction of submarkets. Firms expand when they are able to exploit new opportunities that arrive in the form of submarkets; they contract and ultimately exit when the submarkets in which they operate are destroyed. This simple framework can transparently explain a wide range of well-known regularities about industry dynamics, most notably the subtle relationships between size, age, growth, and survival. Data on the laser industry, where submarkets are prominent, further illustrate the ability of the model to explain distinctive patterns in the evolution of industries and firms.