11 - How Does the Competitive Process Work?

Summary

This chapter brings together ideas from earlier chapters on decision-making and integrates them with perspectives from evolutionary economics to analyze the process of structural change. It begins with a neo-Marshallian view of the competitive process and price setting in a mature industry, which is then extended to consider how selection processes work when an industry is disrupted by customers switching to different products or the uptake of innovative production systems. This leads to a view of industries as being akin to sporting leagues in which the winners can increasingly dominate unless new entrants or less-successful firms can fight back despite smaller profits by rewriting the rules of the game. The uptake of new concepts is analyzed via Dopfer et al.’s “micro–meso–macro framework,” in which a “meso” is a generic concept that firms apply in different “micro” ways, often triggering much wider “macro” changes (e.g., impacts of smartphone apps) but where adoption can be delayed by deal-breaker issues with initial versions and other sources of resistance to change. Finally, the chapter examines how shifting corporate politics shapes how bold firms are in making innovations and how the changing distribution of knowledge in an industry affects the division of labor between firms.