Gaining Steam: Incumbent Lock-In and Entrant Leapfrogging

160 Pages Posted: 29 Apr 2024

See all articles by Richard Hornbeck

Richard Hornbeck

University of Chicago - Booth School of Business

Shanon Hsuan-Ming Hsu

University of Chicago

Anders Humlum

University of Chicago Booth School of Business

Martin Rotemberg

New York University (NYU) - New York University

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Date Written: April 2024

Abstract

We examine the long transition from water to steam power in US manufacturing, focusing on early users of mechanical power: lumber and flour mills. Digitizing Census of Manufactures manuscripts for 1850 to 1880, we show that as steam costs declined, manufacturing activity grew faster in counties with less waterpower potential. This growth was driven by steam powered entrants and agglomeration, as water powered incumbents faced switching barriers primarily from sunk costs. Estimating a dynamic model of firm entry and steam adoption, we find that the interaction of switching barriers and high fixed costs creates a quantitatively important and socially inefficient drag on technology adoption. Despite substantial entry and exit, switching barriers remained influential for aggregate steam adoption throughout the 19th century, as water power required lower fixed costs and therefore was attractive to relatively low productivity entrants. These entrants then became incumbents, locked into water power even if their productivity grew.

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Suggested Citation

Hornbeck, Richard and Hsu, Shanon Hsuan-Ming and Humlum, Anders and Rotemberg, Martin, Gaining Steam: Incumbent Lock-In and Entrant Leapfrogging (April 2024). NBER Working Paper No. w32384, Available at SSRN: https://ssrn.com/abstract=4810599

Richard Hornbeck (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Shanon Hsuan-Ming Hsu

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Anders Humlum

University of Chicago Booth School of Business ( email )

Chicago
United States

Martin Rotemberg

New York University (NYU) - New York University ( email )

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