Industry Life Cycles in General Equilibrium

Abstract

Technological breakthroughs shape the life cycle of industries. Using patent data, we show that the ICT Revolution of the late 1980s generated new technological opportunities across non-ICT industries, leading to an initial phase of rapid growth in patenting and product innovation. Eventually, however, this gave way to a shakeout, characterised by a fall in the number of patenting firms and a greater prevalence of process innovation. To capture these patterns, we build a general equilibrium model of industry life cycles, featuring endogenous innovation choices and oligopolistic competition between an endogenously determined number of heterogeneous firms within each industry. We then use our model to study the welfare consequences of different R&D subsidy policies. Preliminary results show that subsidies have non-monotonic implications for welfare and accelerate life cycles.

Keywords: Industry Life Cycles, Product Innovation, Process Innovation, ICT, Technology

JEL Classification: E22, L13, L22, O31