Churn, Baby, Churn: Strategic Dynamics Among Dominant and Fringe Firms in a Segmented Industry

Abstract

This paper integrates and extends the literatures on industry evolution and dominant firms to develop a dynamic theory of dominant and fringe competitive interaction in a segmented industry. It argues that a dominant firm, seeing contraction of growth in its current segment, enters new segments to exploit its technological strengths, but segments sufficiently distant to avoid cannibalization. The dominant firm acts as a low-cost Stackelberg leader, driving down prices and triggering a sales takeoff in the new segment. We identify a "churn" effect associated with dominant firm entry: fringe firms that precede the dominant firm into the segment tend to exit the segment, while new fringe firms enter, causing a net increase in the number of firms in the segment. As the segment matures and sales decline in the segment, the process repeats itself. We examine the predictions of the theory with a study of price, quantity, entry and exit across 24 product classes in the desktop laser printer industry from 1984 through 1996. Using descriptive statistics, hazard rate models, and panel data methods, we find empirical support for most of the theoretical predictions.

Keywords: competitive dynamics, industry evolution, segmented industries, dominant firms

JEL Classification: L11, L13, L63