Klepper Simons

The Making of an Oligopoly: Firm Survival and
Technological Change in the Evolution of the

U.S. Tire Industry
Steven Klepper
Carnegie Mellon University
Kenneth L. Simons
Royal Holloway, University of London
The number of producers in the U.S. tire industry grew for 25 years
and then declined sharply, and the industry evolved to be an oligopoly.
The role of technological change in shaping the industry’s market
structure is explored. A model of industry evolution featuring tech-
nological change is used to derive predictions that are tested using a
novel data set on firm entry, exit, size, location, distribution networks,
and technological choices prior to the shakeout of producers. Con-
sistent with the model, earlier-entering and larger firms survived
longer, principally because of the influence of age and size on tech-
nological change.
I. Introduction
One of the central issues in industrial organization concerns the de-
terminants of market structure. A wide array of determinants have been
We thank Gloria Klepper and Vincent Klepper for their help in data collection. Tim
Leunig, John Miller, Sherwin Rosen, Jonathan Wadsworth, an anonymous referee, and
participants in seminars at Wharton, the University of Michigan, Humboldt University,
the University of Augsburg, the Augsburg Workshop on Economic Evolution, Learning,
and Complexity, and the University of Florida provided helpful comments. Klepper grate-
fully acknowledges support from the Economics Program of the National Science Foun-
dation, grant SBR-9600041.
[Journal of Political Economy, 2000, vol. 108, no. 4]

q 2000 by The University of Chicago. All rights reserved. 0022-3808/2000/10804-0005$02.50
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making of an oligopoly 729
considered. Early work focused on the importance of production scale
economies in conditioning market structure. Subsequently, attention
focused on the importance of marketing and distribution economies
and, spurred by Schumpeter, the link between market structure and
technological change (Dasgupta and Stiglitz 1980; Nelson and Winter
1982; Shaked and Sutton 1987; Klepper 1996a). Indeed, in his analysis
of the emergence of large-scale enterprise in the United States, Britain,
and Germany, Chandler (1990) touches on the importance of all three
factors in contributing to first-mover advantages and the evolution of
market structure. No consensus has emerged, though, on the role played
by either marketing/distribution or technological change in shaping
market structure, and production scale economies do not appear to
explain much of the cross-sectional variation in manufacturing industry
concentration ratios (Bain 1956; Scherer et al. 1975).
The U.S. tire industry is a microcosm of the broader debate on the
determinants of market structure. It is an intriguing industry because
it not only became highly concentrated but also experienced a severe
shakeout in which the number of firms declined by over 80 percent in
14 years after steady growth in the number of firms for the first 25 years
of the industry. As in the larger debate, competing explanations have
been offered for the evolution of the market structure of the industry.
Knox (1963, pp. 157–58) attributes the shakeout and subsequent rise
in market concentration to the advent of mass distributing methods,
which revolutionized tire marketing, and to decreased demand resulting
from increased tire mileage. Alternatively, Jovanovic and MacDonald
(1994) develop a theory in which shakeouts are caused by a major
innovation that is challenging to adopt and that increases the optimal
size firm. They test their theory by fitting it to data for the tire industry
on the evolution of the number of firms, price, and output, identifying
the Banbury mixer, a major process innovation, as the possible cause
of the shakeout in tires. Warner (1966) explores the role of technolog-
ical change generally in shaping the market structure of the industry.
He finds that the cost of staying up with the technological frontier in
the postshakeout era was prohibitive for all but the leading firms, sug-
gesting that technological change played an important role in shaping
the market structure of the industry. French (1991) also explores tech-
nological change as well as marketing and distribution in his history of
the industry, all of which appear to have contributed in some way to
the evolution of the industry’s market structure.
In this paper, we bring to bear new information on the early evolution
of the tire industry to analyze the role of technological change in shap-
ing the evolution of the market structure of the industry. We exploit a
new data set that was assembled from firm price lists of product offerings
to develop a technological snapshot of the industry around the start of
730 journal of political economy
its shakeout. This information was coupled with information for each
firm on its date of entry, date of exit, form of exit, size, location, and
distribution network to analyze the role of technological change and
other factors in shaping the market structure of the industry. A model
of industry evolution featuring dynamic increasing returns from re-
search and development developed by Klepper (1996a, 1996b) is used
to structure the analysis of the data. The model has a number of dis-
tinctive implications regarding technological change and firm survival
that are tested using our data set. These tests provide insight into not
only the relationship between market structure and technological
change but also the role of firm age, size, geographic location, and
distribution networks in conditioning technological choices and sur-
vival. The findings are consistent with the various predictions of the
theory and indicate that older and larger firms survived longer, prin-
cipally because of the influence of age and size on technological change.
Firms located around the geographic center of the industry were also
found to be more technologically progressive, which contributed to their
longer survival.
The paper is organized as follows. In Section II, a brief history of the
evolution of the industry in terms of entry, exit, market structure, and
technological change during the formative years of the industry is pre-
sented. In Section III, the theoretical model is presented and various
predictions of the model regarding firm technology choices and survival
are developed. In Section IV, the predictions are tested. In Section V,
the implications of the tests for the various theories concerning the
market structure of the industry are discussed. Concluding remarks are
offered in Section VI.
II. The Early Tire Industry1

The development of the U.S. automobile tire industry parallels the de-
velopment of the U.S. automobile industry. Goodrich supplied the first
pneumatic tires for automobiles in 1896, one year after the start of the
U.S. automobile industry. The tire industry subsequently began to grow
rapidly when automobile sales increased sharply beginning around 1905.
Sales grew by 29 percent per year in the decade 1909–19 and continued
to grow by 8 percent per year in the decade 1919–29 despite a temporary
setback due to the national recession of 1920–21. The Great Depression
hit the industry hard, and by 1936 sales were still below their 1929 level
(Gaffey 1940, p. 55). About 30 percent of all tires were sold to auto-
mobile manufacturers and the other 70 percent were sold for replace-
1
This section draws from Gaffey (1940), Allen (1949), Lief (1951), Warner (1966),
O’Reilly (1983), and French (1991).
Fig. 1.—Entry, exit, and number of tire producers, 1905–80
ment. In the 1920s large chains such as Sears, Roebuck and Montgomery
Ward entered the wholesale and retail replacement market, marketing
private-label tires. In 1926, Sears negotiated a landmark contract to
purchase tires from Goodyear on a cost-plus basis, which triggered a
prolonged price war.
Entry, exit, and the number of producers from 1905 to 1980 based
on annual editions of Thomas’ Register of American Manufacturers are pre-
sented in figure 1. The bottom panel indicates that the annual number
of entrants averaged approximately 15 in 1906–11, doubled to 30 in
1911–22, and then peaked at 57 in 1922, after which entry dropped
sharply and was negligible as of 1929. The number of firms also peaked
in 1922 at 274, after which it fell sharply, dropping to 49 firms in 1936
and continuing to fall at a more modest rate thereafter. The top panel,
which graphs the percentage of firms exiting on an annual and five-
year moving average basis, indicates that the exit rate surged for one
to two decades after 1922, fueling the shakeout of producers. Thus,
beginning in 1922, entry declined, the industry exit rate increased
sharply, and the number of firms declined by over 80 percent in less
than 15 years, despite continued growth in the market up to the Great
Depression.
The four largest firms in the industry—Goodyear, Goodrich, United
States Rubber (later Uniroyal), and Firestone—all entered by 1906. They
increased their collective market share during the shakeout from 53.3
percent in 1926 to 72.1 percent in 1933 (French 1991, p. 47). The
industry subsequently remained a tight oligopoly, with the market share
of these four firms varying between 74 percent and 79 percent over the
next 25 years (Warner 1966, p. 16). Goodyear, Goodrich, and Firestone
were all located in Akron, Ohio, and about a quarter of all firms in the
industry at the start of the shakeout were located within 50 miles of
Akron, which was the geographic center of production in the industry.
During the first 40 years of the industry, innovation greatly lowered
the price of tires and improved their quality. The production process
was mechanized through a large number of incremental innovations
and a few major ones, including the Banbury mixer, which greatly econ-
omized on the labor needed to mix rubber and chemicals,2 and two
major innovations in the machinery used to build tires. Labor produc-
tivity increased dramatically, and the wholesale price index of tires de-
clined from 175 in 1914 to 47 in 1935 (Gaffey 1940, p. 51). New tire
designs and a host of other innovations (see Warner 1966, pp. 268–70)
greatly improved the longevity of tires. Average tire mileage rose steadily
from 2,000 in 1905 to 20,000 in 1937 (Gaffey 1940, p. 39).
Perhaps the most important design innovations were the cord and
balloon tires. The body or carcass of a tire was originally composed of
plies of cotton fabric meshed with rubber, which was covered by a rubber
tread that met the road. The cord tire removed the cross threads from
the cotton fabric used to form the plies, which eliminated the abrasion
of cotton cord against cord that had been a major factor limiting tire
mileage. Under a license from their English developer, cords were in-
troduced in the United States in 1910 by Goodrich and Diamond
2
Chemicals are added to rubber to improve its performance and for vulcanization,
during which the components of the tire are fused together through the application of
heat and pressure.
Rubber, which were soon to merge. Although cords significantly in-
creased mileage, they were initially two to three times as expensive as
fabric tires, which limited their rate of diffusion. The initial English
patent did not prevent firms from developing alternative cord designs,
and Goodyear and later Firestone developed innovations in cord thick-
ness, methods of impregnating the cords with rubber, machinery to
form and cut the cord plies, and vulcanization processes, which spurred
adoption of the cords. The percentage of tire sales accounted for by
the cord was 10 percent in 1917 and then increased sharply, rising by
5 percent per year to a peak of 58.8 percent in 1924 (Gaffey 1940, p.
43).
The balloon tire provided the final impetus for the cord to displace
completely the fabric tire. It was an outgrowth of a new method devel-
oped by Firestone to impregnate cotton cords with rubber. This method
led to a more resilient and flexible tire that enabled Firestone to widen
the cross section and lower the air pressure of the tire for greater com-
fort. It unexpectedly increased substantially the mileage of the tire, and
after a skeptical greeting following its introduction in late 1923, the
smaller, squatter tire (ergo its name) caught on rapidly. Within a few
years the balloon had captured over half the market, and fabric tires
soon became extinct.3 Despite an initial patent granted to an indepen-
dent inventor, the balloon was widely produced and the patent was later
overturned.
With the ultimate displacement of the fabric tire by the cord and
balloon, managing the transition to these new tires was essential for
survival. This was not a smooth or easy transition. Many improvements
were made in the cord over time, especially by Goodyear and Firestone.4
By lengthening the life of the carcass of the tire, the cord also raised
the importance of increasing the life of other parts of the tire. This
contributed to innovations such as the use of carbon black, which greatly
improved the life of the tread (Warner 1966, p. 102). The balloon, which
was a direct outgrowth of the cord, also required improvements to re-
dress initial performance problems (p. 105). At the firm level, the tran-
sition to the cord took place mainly from 1917 to 1923, with many firms
starting to produce the cord just prior to the shakeout. If technological
change was a key factor contributing to the shakeout of producers and
the evolution of oligopoly, being in the vanguard of this shift should
3
Firms that produced the cord and later the balloon also produced fabric tires while
demand for fabric tires remained.
4
These innovations were instrumental in enabling Goodyear and Firestone each to
capture a substantial share of the market for cords (Allen 1949, pp. 37–39; Lief 1951, pp.
103–5) and helped Goodyear become the leading producer by 1916 (Allen 1949, pp.
39–40).
have had an important influence on firm survival. In the next section,
detailed predictions are developed to probe this idea further.
III. Theory
The review of the early history of the U.S. tire industry indicated that
the industry experienced considerable technological change and
evolved to be a tight oligopoly after experiencing a severe shakeout of
producers. A model to explain shakeouts and the evolution of market
structure as well as a number of other regularities in the evolution of
new industries was proposed in Klepper (1996a). The model features
the role of increasing returns from R & D in shaping the evolution of
entry, exit, market structure, and innovation in industries with rich op-
portunities for product and process innovation. The model was subse-
quently adapted in Klepper (1996b) to explain firm survival patterns in
tires and four other technologically progressive products that experi-
enced severe shakeouts and were highly concentrated. In this section,
the model in Klepper (1996b) is described and the main results of the
model are sketched out. The model is then used to generate distinctive
predictions regarding how the likelihood of producing the cord tire
prior to the shakeout should have been related to firm age and size and
how in turn production of the cord and firm age and size should have
been related to the length of firm survival. These predictions are tested
in the next section, thereby providing a test of the model’s character-
ization of the forces shaping the evolution of market structure in in-
dustries with rich opportunities for product and process innovation.
A. The Model
The model is specified in discrete periods. In each period, a new cohort
of potential entrants composed of start-ups and firms with experience
in related technologies and industries arises. Potential entrants are as-
sumed to be heterogeneous in their capabilities. This heterogeneity is
captured by assuming that only a fraction of potential entrants are ca-
pable of conducting innovation, with the rest imitators. The fraction of
innovators is assumed, for simplicity, to be the same in each cohort.
Innovators can invest in R & D to lower their average cost of production
(per unit of quality), with R & D in each period subject to diminishing
returns. It is assumed that production at small levels of output is subject
to scale economies, after which the average cost of production is con-
stant, independent of output. In each period new R & D opportunities
arise to lower average cost. Since the profits from lowering average cost
are proportional to the level of output of the firm, in each period the
profits from any given level of R & D are scaled by the output of the
firm. All innovations are costlessly imitated by all firms one period after
they are introduced, so that over time the average cost of all firms
declines.
In each period, all firms, including entrants, incur a cost to increase
their output, reflecting the cost of attracting new customers and rep-
licating operations. The marginal cost of each unit of growth in a period
is increasing, which limits the rate of expansion of firms at any given
moment. Potential entrants in each period consider their optimal
R & D and level of output (given the costs of growth) and enter as
long as their associated profit is nonnegative. Incumbent firms also
choose R & D and output growth to maximize current profits. The
industry demand curve is assumed to be constant over time and all firms
are assumed to be price takers, with price clearing the market in each
period given firm output choices.
Exit can occur for two reasons. Competitive exit occurs if price de-
clines sufficiently to cause a firm’s maximum profit to be negative. Firms
also exit because of adverse decisions under uncertainty that lead to
temporary average cost increases and negative profits. This type of exit,
which is called random exit, is modeled probabilistically. With the max-
imum possible profit margin always greater for innovators than for im-
itators by dint of their R & D, it is assumed that the probability of random
exit is lower for innovators than for imitators. For simplicity, the prob-
ability of random exit is assumed to be the same for all firms of each
type and to be constant over time. Random exit occurs in all periods,
but competitive exit is assumed to occur only after the shakeout has
started and price-cost margins are sufficiently compressed. The price in
the first period is assumed to exceed the average cost of all potential
entrants, so initially both imitators and innovators enter. Over time,
growth in industry output due to entry and incumbent expansion is
assumed to be sufficient to cause price to decline each period by more
than the decline in average cost of all producers following the imitation
of last period’s innovations.
B. Implications of the Model

Klepper (1996b) derives a number of implications of the model. In each
period, firms expand until the marginal cost of growth equals their
price-cost margin. Consequently, innovators are always larger than im-
itators that entered in the same period because they have lower average
costs and hence greater price-cost margins. With price declining more
than average cost after imitation of last period’s innovations, entrants
face smaller price-cost margins over time. This causes their output and
profits at entry to decline over time. Thus, while initially both imitators
and innovators enter, eventually price-cost margins are sufficiently com-
pressed that imitators no longer find it profitable to enter, and entry
cohorts are composed only of innovators. Further compression of price-
cost margins eventually causes entry by innovators no longer to be prof-
itable, at which point all entry ceases. Exit continues, though. In addition
to random exit, competitive exit occurs as the lowest-cost incumbents
expand and push down price-cost margins, forcing the highest-cost firms
to exit the industry. With entry ceasing and exit continuing, a shakeout
of producers occurs despite continued growth in industry output.
Ultimately, the industry is dominated by the earliest-entering inno-
vators. In every period they are the largest firms in the industry. Con-
sequently, they do the most R & D because the resulting decrease in
average cost can be applied over a larger level of output than for all
other firms. As price-cost margins decline over time, later entrants are
the first to succumb to competitive exit and the earliest-entering in-
novators take over an increasing share of the industry’s output. Com-
paring the hazard of early and later entrants at comparable ages, Klepper
(1996b) demonstrates that earlier entrants must have a lower hazard at
older ages. In contrast, at younger ages the earlier-entry cohorts are
composed of both imitators and innovators whereas the later-entry co-
horts are composed of only innovators. This could cause the earlier-
entry cohorts at young ages to have a greater hazard of exit than the
later-entry cohorts because of the greater probability of random exit of
imitators than of innovators. Thus the model predicts that the time of
entry should have the most pronounced effect on the hazard of exit at
older ages. This is consistent with cohort exit patterns in tires (Klepper
1996b), as discussed further below.
Thus the model can account for the shakeout in tires and the increase
in market share of the top firms during the shakeout, and it is consistent
with cohort exit patterns. It can be structured further to yield additional
predictions about the types of firms that would be first to produce the
cord tire prior to the shakeout. It also yields distinctive predictions
regarding the influence of early cord production and other firm char-
acteristics on firm survival. These additional implications provide a way
of probing the model’s explanation for the shakeout in tires and more
generally for evaluating the role of technological change in the
shakeout.
The additional implications of the model are demonstrated in table
1. Three time periods, 1, 2, and 3, are denoted, with period 3 assumed
to be just before the start of the shakeout. Four (ordinal) size categories,
1, 2, 3, and 4, are also denoted. For simplicity, potential entrants in
each time period are assumed to consist of nine innovators and eight
imitators. It is assumed that in periods 1 and 2 it is profitable for both
innovators and imitators to enter, but by period 3 price has declined
sufficiently that only innovators can profitably enter. Accordingly, in
TABLE 1
Illustration of the Theory: Number of Innovators and Imitators, by Size
Category and Entry Cohort
Percentage
of Innova-
Size Cohort
Entry tors, All
Cohort Size 1 Size 2 Size 3 Size 4 Sizes
A. At the Time of Entry of Each Cohort
1 8 imitators 9 innovators
2 8 imitators 9 innovators
3 9 innovators
B. At the Time of Entry of the Last-Entry Cohort
1 2 imitators 4 innovators 67
2 4 imitators 6 innovators 60
3 9 innovators 100
Percentage
of inno-
vators, all
entry
cohorts 100 0 75 100 76
panel A, which lists the entrants in each period and their size at the
time of entry, all nine innovators and all eight imitators enter in periods
1 and 2 whereas only the nine innovators enter in period 3. Innovators
always enter at a larger size than imitators, and for each type of entrant
the optimal size at entry declines over time. Accordingly, innovators in
period 1 enter at a larger size (size 3) than innovators in period 2 (size
2), who in turn enter at a larger size than innovators in period 3 (size
1). Similarly, imitators in period 1 enter at a larger size (size 2) than
imitators in period 2 (size 1), and in both periods the imitators enter
at a smaller size than the innovators.
Panel B of table 1 presents the expected number and size of firms
in each entry cohort still in the industry as of period 3, just prior to
the start of the shakeout. In each period, firms are subject to random
exit. Imitators have a higher probability of random exit than innovators,
which is operationalized by assuming that the probability of random
exit in each period of evolution is one-half for imitators and one-third
for innovators. Between its time of entry and period 3, the first cohort
experiences two periods of evolution. Thus, in period 3 the expected
number of innovators in entry cohort 1 is (1 2 13 )2 # 9 p 4 and the
expected number of imitators is (1 2 12 )2 # 8 p 2. Similarly, the second
cohort of entrants experiences one period of evolution between its time
of entry and period 3. Thus in period 3 the expected number of in-
novators in entry cohort 2 is (1 2 13 ) # 9 p 6 and the expected number
of imitators is (1 2 12 ) # 8 p 4. The last cohort, which entered in period
3, does not experience any evolution and thus is still composed of its
original nine innovators. Firms that remain in the industry grow each
period. Accordingly, in panel B the sizes of the firms in the first two
entry cohorts are greater than their sizes at entry as reflected in panel
A.
In panel B, the percentage of firms in period 3 that are innovators
is listed in column 5 for each entry cohort and in the bottom row for
each size category. If only innovators produced the cord tire as of the
start of the shakeout, then these percentages can be interpreted as the
percentage of firms in each entry cohort and size category that would
be expected to produce the cord tire just prior to the start of the shake-
out. Column 5 indicates that the percentage declines from cohort 1 to
cohort 2 and then rises in cohort 3, which suggests a U-shaped pattern
between the time of entry and the percentage of firms producing the
cord tire just prior to the start of the shakeout. Similarly, the percentages
in the bottom row suggest a similar U-shaped pattern between the per-
centage of cord producers and firm size, with the percentage declining
from size category 4 to 3 to 2 and then rising in size category 1. Both
U-shaped patterns will hold generally in the model as long as the last
cohort of entrants is composed of only innovators.5 The U-shaped pat-
terns are the result of selection forces that operate most intensively on
the initial entrants after they enter and on the latest entrants as of their
time of entry. Thus the model predicts distinctive U-shaped relationships
between the percentage of firms producing the cord tire just prior to
the shakeout and the time of entry and firm size. A further prediction,
illustrated also in panel B of table 1, is that just prior to the start of the
shakeout there should be less dispersion in firm sizes in the early- and
late-entry cohorts than the intermediate cohorts, with firm sizes in the
5
To see this, let f denote the fraction of firms that are innovators in entry cohorts
initially containing both imitators and innovators and let pR and pI denote the probabilities
of random exit for innovators and imitators, respectively. After t periods, the ratio of the
expected number of surviving innovators to the expected number of surviving imitators
is
1 2 pR t
( )(
f
1 2 f 1 2 pI ) .
Since pR ! pI, it follows that this ratio is an increasing function of t. Hence at any given
time, among cohorts originally containing both innovators and imitators, the older the
cohort, the greater t and hence the greater the percentage of survivors that are innovators.
Among younger cohorts that were composed originally of only innovators, the percentage
of survivors that are innovators is always equal to 100. Therefore, beginning with the oldest
firms, the percentage of firms at any given time that are innovators and hence cord
producers must decline as age declines until the percentage jumps to 100, giving rise to
the U-shaped relationship between cord production and time of entry. A similar proof
holds with regard to size. Note that depending on specific assumptions about entry sizes
and growth, additional nonmonotonicities could arise within the U-shaped relationship
between cord production and size.
early and late cohorts concentrated at opposite ends of the firm size
spectrum.
The model also has distinctive implications regarding production of
the cord tire and firm survival. The model predicts that at any given
time, among innovators the larger the firm, the greater its spending on
R & D and the longer its survival. Given the assumption that only in-
novators produce the cord tire prior to the shakeout, this implies that
among cord producers prior to the shakeout, the hazard of exit at each
time in the future should be lower the larger the firm. In contrast,
imitators do not conduct R & D, and thus firm size does not condition
their R & D efforts. Consequently, among firms not producing the cord
prior to the shakeout, size should be a less important determinant of
the hazard of exit (hereafter, the phrase “at each point in time in the
future” is omitted for brevity). Furthermore, the model implies that for
innovators and imitators of the same size prior to the shakeout, inno-
vators will survive longer because of their greater profit margin from
R & D. Consequently, for each size firm, the hazard of exit should be
lower for producers than for nonproducers of the cord. The model even
leaves open the possibility that imitators of all sizes might be less prof-
itable than all innovators, in which case the hazard of exit would be
less for the smallest cord producers than for the largest nonproducers
of the cord.
A last set of implications of the model concerns the relationship be-
tween firm survival and firm age and size with and without controls for
production of the cord tire. The model implies that among firms in the
industry prior to the shakeout, if cord production and size are con-
trolled, the age of the firm should have no effect on the hazard of exit.
On the other hand, if neither firm size nor cord production is con-
trolled, the model predicts that the hazard of exit will be related to the
age of the firm. The nature of this relationship depends on the degree
to which cohorts have a comparable composition prior to the shakeout.
Recall that the model predicts that early-entry cohorts are initially com-
posed of a smaller fraction of innovators than later-entry cohorts. Over
time, though, the fraction of imitators in the early-entry cohorts declines
because of the greater probability of random exit of imitators than of
innovators. This is why earlier entrants eventually have lower hazards
at older ages. If by the start of the shakeout the imitators in the early-
entry cohorts have largely exited, the hazard of exit will be lower for
older firms. Thus the model predicts that to the extent that the hazard
of firms in the industry prior to the shakeout declines with age, this
should be entirely explained by firm size and production of the cord
tire prior to the shakeout.
The model makes no predictions regarding how cord production and
firm survival are related to the location of the firm. However, geographic
TABLE 2
Hypotheses
1. The likelihood of cord production falls and then rises with firm age and
also falls and rises with firm size, and the dispersion of firm sizes is lower
in early- and late-entry cohorts than in intermediate entry cohorts
2. Given the age and size of the firm, the likelihood of cord production is
greater for firms located around Akron
3. The hazard of exit is lower for older firms and for firms located around
Akron
4. Given firm size and cord production, the hazard of exit is unrelated to the
age of the firm and whether it is located around Akron
5. For each size firm, the hazard of exit is lower for producers of the cord tire
6. Among producers of the cord tire, the hazard of exit is lower the larger
the firm
7. Firm size lowers the hazard of exit more for producers than for nonprodu-
cers of the cord tire
localization of knowledge spillovers (Jaffe, Trajtenberg, and Henderson

1993) suggests that firms situated in geographic areas that are densely
populated by producers may be able to stay closer to the technological
frontier. In the context of the model, this suggests that if age and size
are controlled, firms located around Akron, Ohio, the geographic center
of the industry, would be more likely to produce the cord tire prior to
the shakeout than non-Akron-based firms. If production of the cord is
not controlled, this suggests that even if age or size or both are con-
trolled, Akron-based firms would also have a lower hazard of exit than
non-Akron-based firms. Under the assumption that location operates
principally by conditioning whether firms are innovators, however, the
model implies that if cord production and firm size are controlled,
location should have no effect on the hazard of exit.
The various hypotheses implied by the model concerning cord pro-
duction and the determinants of the hazard of exit are summarized in
table 2 in the order in which they will be tested. The first two hypotheses
pertain to the factors, including location, affecting a firm’s likelihood
of producing the cord tire prior to the shakeout. The next hypothesis
pertains to the effect of firm age and location on the hazard of exit
when neither firm size nor cord production is controlled. Finally, the
rest of the hypotheses predict how the hazard of exit is related to cord
production and firm size, and in turn how firm age and location should
have no effect on the hazard of exit when firm size and cord production
are controlled.
IV. Hypothesis Tests

Testing the hypotheses in table 2 requires data on which firms produced
the cord tire prior to the shakeout; the age, size, and location of the
firms prior to the shakeout; and the number of years they subsequently
survived. Data on cord production were developed from the October
1920 issue of the Tire Rate Book, a quarterly industry trade journal pub-
lished from 1915 to 1930 that provided price lists for all tire manufac-
turers. Our sample is composed of the 155 firms listed in the October
1920 issue and also listed as tire producers in Thomas’ Register of American
Manufacturers.6 The 111 of the 155 firms that quoted a price for a cord
tire were distinguished as cord tire producers. As discussed further be-
low, we also exploited the only earlier surviving issue of the Tire Rate
Book, for September 1917, which listed eight producers of the cord tire,
and the October 1923 issue, which listed the first 21 producers of the
balloon tire. The age, years survived, location, and size of each firm
were measured using annual editions of Thomas’ Register, supplemented
for the earliest entrants by an earlier trade journal, Hendricks’ Commercial
Register of the United States for Buyers and Sellers. For each firm, its age was
based on its year of entry, the number of years survived was based on
its year of exit, its location was based on its 1920 address, and its size
was based on its 1920 total capitalization, classified into one of 11 cat-
egories ranging from $500–$1,000 to $1 million and above or into a
twelfth category for unknown capitalization.7 Various industry studies
were exploited to identify firms that exited by acquisition, and this in-
formation was used to handle censoring.8 Finally, a trade directory in
an appendix of Tufford (1920) containing 71 firms in the sample in-
dicated whether each firm had dealers and distributors located in large
6
This includes most of the tire manufacturers in the October 1920 issue.
7
The first volume of Thomas’ Register pertained to the year 1905/6. To determine whether
firms listed in the first volume might have entered earlier, earlier volumes of Hendricks’
Commercial Register were consulted. All of the firms listed in the 1905/6 volume of Thomas’
Register were listed in the 1901 or 1902 volume of Hendricks’ Commercial Register. Accordingly,
we used the date on which they were first listed in Hendricks’ Commercial Register to determine
their date of entry and hence age. Data from Thomas’ Register were collected for pneumatic
and cushion automobile tire producers through the 1981 edition, after which the classi-
fication system for tire manufacturers was changed. Dates for some editions of the register
predated the date printed on the spine by one year on the basis of information from the
publisher and from the individual registers. In these instances, the earlier date was em-
ployed. No volume of Thomas’ Register was published for the entry year 1921, and some
of the firms in our sample were initially listed in the 1922/23 volume of Thomas’ Register.
For these firms, their address and capitalization were taken from the 1922/23 volume.
On the basis of their listing in the October 1920 issue of the Tire Rate Book, it was assumed
that they produced tires in 1921, if not earlier. Accordingly, for all firms in the sample
the number of years of survival was computed as the difference between their year of exit
and 1921.
8
Information about mergers and acquisitions was drawn from Gettell (1940), Epstein
(1949), Bray (1959), Federal Trade Commission (1966), Dick (1980), French (1991), and
an internal Uniroyal report kindly provided by Michael French. Mergers and acquisitions
involving multiple tire producers were treated as continuations of the leading producer
(generally the producer that retained its name) and exit of all other entities.
TABLE 3
A. Incidence of Cord Production, October 1920, for 155 Tire Producers
Size (Million $) Percentage

Cord
X .01–.1 .1–.3 .3–.5 .5–1.0 1.01 Producers
Entry Year (1) (2) (3) (4) (5) (6) (7)
1901 100 (4) 100 (4)
1902 100 (1) 100 (1) 100 (1) 100 (2) 100 (5)
1906 100 (2) 100 (2)
1907 100 (1) 100 (1)
1909 100 (1) 0 (1) 50 (2)
1911 50 (2) 0 (1) 100 (1) 83 (6) 100 (3) 77 (13)
1913 100 (2) 50 (4) 100 (1) 83 (6) 80 (5) 78 (18)
1915 100 (2) 100 (1) 100 (3) 100 (6)
1916 100 (2) 33 (3) 100 (1) 100 (3) 33 (3) 67 (12)
1917 100 (2) 0 (1) 100 (2) 50 (2) 50 (2) 67 (3) 67 (12)
1918 33 (3) 25 (4) 75 (4) 50 (2) 33 (3) 100 (2) 50 (18)
1919 90 (10) 67 (3) 60 (5) 0 (1) 50 (2) 100 (2) 74 (23)
1920 60 (5) 50 (2) 0 (1) 50 (2) 100 (1) 100 (1) 58 (12)
1922 88 (8) 0 (1) 90 (10) 33 (3) 0 (2) 50 (2) 70 (27)
Percentage
cord
producers 79 (28) 60 (20) 69 (32) 65 (17) 70 (27) 81 (31) 72 (155)
B. Percentage Cord Producers by Entry Year and Whether Located in Akron
1919–22 1916–18 1911–15 1901–9 Total
Akron area
firms 83 (12) 89 (9) 92 (12) 100 (5) 89 (38)
Non-Akron
firms 66 (50) 52 (33) 76 (25) 89 (9) 66 (117)
C. Percentage Cord Producers by Size (Million $) and Whether Located in
Akron
X .01–.5 .5–1.0 1.01 Total
Akron area
firms 100 (8) 71 (14) 100 (6) 100 (10) 89 (38)
Non-Akron
firms 70 (20) 64 (55) 62 (21) 71 (21) 66 (117)
Note.—Numbers in parentheses are total producers.
cities in various states.9 A total of 51 firms did, and this information was
used to control for the extensiveness of firm distribution networks, a
possible determinant of firm survival not addressed by the theory.
A. Technological Leadership
The first two hypotheses summarized in table 2 pertain to the deter-
minants of cord production prior to the shakeout. They are evaluated
using table 3, which reports the percentage of firms in the sample pro-
ducing the cord in each entry cohort–size category (the total number
9
Tufford’s list is disproportionately composed of earlier entrants and includes some
firms that had exited by 1920, suggesting that it was compiled prior to 1920.
of firms in each cell is also reported). The entry cohorts span 1901–22,
with the first two cohorts determined from Hendricks’ Commercial Register
(see n. 7) and the rest from Thomas’ Register (the gaps between some
of the years after 1906 reflect the years Thomas’ Register was not pub-
lished). The largest four size categories in table 3 correspond to the
largest four in Thomas’ Register, the .01–.1 category combines the next
three categories in Thomas’ Register (all but two of the firms were in the
highest of these three categories), and a final category contains the
firms in the unknown category in Thomas’ Register, labeled as X (there
were no firms in the four smallest size categories in Thomas’ Register).
Firms in the X category came entirely from the last five entry cohorts
and were presumed to be the smallest firms. The percentage of firms
producing the cord by entry cohort is reported in column 7 and by size
category in the bottom row of the table.
The tabulations by entry cohort and size category reflect the U-shaped
patterns predicted in hypothesis 1. Consider first the rate of cord pro-
duction by entry cohort in column 7 of the table. Among the 14 firms
that entered in the first five cohorts, 13 (93 percent) produced the cord.
The percentage of firms producing the cord is lower in the next six
entry cohorts, dropping to 67 percent in 1916 and 1917 and reaching
a low of 50 percent in 1918. It rises in the last three cohorts, with 69
percent of the firms in these cohorts producing the cord. A similar U-
shaped pattern is reflected in the rate of cord production by size cat-
egory. In the top size category of $1 million and above, 81 percent of
the firms produced the cord. This falls to 70 percent for the next size
category and 65 percent for the next three combined, and then rises
to 79 percent for the X category. The dispersion in firm sizes is also
greater in the intermediate entry cohorts than the earlier and later ones,
as predicted in hypothesis 1. In the first five cohorts, 71 percent (10 of
14) of the firms are in the top size category, and in the last three cohorts
73 percent (45 of 62) are in the bottom three size categories. In contrast,
in the six intermediate entry cohorts, 42 percent (33 of 79) of the firms
are in the lowest three categories, 20 percent (16 of 79) are in the
highest category, and the remaining 38 percent (30 of 79) are in the
two intermediate size categories. Thus the patterns accord with the
model’s portrayal of selection forces. The earliest cohorts are the most
selected after entry because of their greater longevity, and the last co-
horts are the most selected at birth, which causes both to have a greater
percentage of cord producers and less dispersion in firm sizes than the
intermediate cohorts.
Hypothesis 2 bears on the relationship between cord production and
firm location and is evaluated using the two summaries in panels B and
C of table 3. The entry cohorts and size categories each are condensed
into four groups, which were chosen to emphasize the U-shaped patterns
TABLE 4
Logit Models for Cord Production
Specification
Variable 1 2 3
Constant 2.047 4.745 4.723
(.762) (2.544) (2.686)
Entry year 2 1900 2.082 2.474 2.468
(.042) (.319) (.334)
(Entry year 2 1900)2 .013 .012
(.010) (.010)
Location around Akron 1.384 1.423 1.365
(.569) (.572) (.576)
Size $1 million and above .272
(.546)
Size X .761
(.540)
Log likelihood 285.799 284.506 283.410
Note.—Standard errors are in parentheses.
predicted by the theory. The two rows of each summary divide the firms
according to whether they were located within 50 miles of Akron. The
differences in the two groups of firms are striking. Among the 38 firms
within 50 miles of Akron, 89 percent produced the cord versus 66 per-
cent of the 117 firms not within 50 miles of Akron. As the summaries
indicate, these differences largely transcend the time of entry and size
of firm. Thus Akron firms of all sizes and ages were more likely to
produce the cord tire. This was not predicted by the increasing returns
theory but conforms to the theory of localized technological spillovers
underlying hypothesis 2.
The statistical significance of these patterns was probed using logit
models relating cord production to firm age, size, and location. Maxi-
mum likelihood estimates computed using the program Stata are re-
ported in table 4 for various model specifications. In specification 1,
the independent variables are entry year 2 1900 and a 1-0 dummy equal
to one for firms located within 50 miles of Akron. The coefficient es-
timates for both variables have the expected signs and are significant
at the .05 level (one-tailed), confirming that older firms and firms lo-
cated within 50 miles of Akron were more likely to produce the cord.
In specification 2, entry year 2 1900 is entered quadratically along with
the Akron variable. The linear and quadratic coefficient estimates have
the expected signs on the basis of the predicted U-shaped relationship,
but neither is significant at conventional levels, although the change in
the log likelihood is nearly significant at the .10 level (on the basis of
the test statistic of two times the change in the log likelihood, which is
distributed asymptotically as x2 with one degree of freedom). The lo-
cation coefficient estimate continues to be significant at the .05 level.
Fig. 2.—Survival of firms by entry cohort
Specification 3 adds size dummies for firms in the top size category of
$1 million and above and the firms of unknown size, thought to be the
smallest firms, with all other firms of intermediate size the omitted
category. The coefficient estimates of both size variables are positive,
reflecting the predicted U-shaped relationship between cord production
and size. However, neither is significant at conventional levels, and their
inclusion does not significantly improve the fit of the model on the
basis of the test statistic of two times the change in the log likelihood.
B. Survival without Controls for Technology

The rest of the hypotheses pertain to firm survival. Figure 2 provides
an overview of firm survival for all firms that entered through 1922,
which encompasses all the firms in our sample as well as ones that exited
earlier. Firms are grouped into three cohorts depending on whether
they entered in 1901–6, 1907–17, or 1918–22, with the groupings chosen
to emphasize the conformance of the survival patterns with the theory.
For each cohort, the age of firms in the cohort is graphed on the
horizontal axis and the percentage of firms surviving to that age is
graphed on the vertical axis. The vertical axis is scaled logarithmically,
which means that the negative of the slope of each curve at any given
age is the hazard rate of the cohort at that age.
At young ages the curves overlap considerably, with the curve for the
1901–6 cohort below the other two. This implies a greater hazard at
young ages for entrants in the first cohort than the later two cohorts.
The slope of the 1901–6 curve flattens out considerably after about age
8 or so, causing the first curve eventually to lie well above the other
two. This indicates that at older ages the earliest entrants have the lowest
hazard. The other two curves separate at a younger age, with the earlier
entrants having a lower hazard. Thus, when the three cohorts are com-
pared at comparable ages, at older ages the hazard is lower the earlier
the time of entry whereas at younger ages the hazard is less clearly
ordered by the time of entry. This conforms with the predictions of the
theory. All three curves tend to flatten out with age, suggesting a general
decline in the hazard with age. The decline is not monotonic, though,
especially for the first two entry cohorts. The letters a, b, c for each
curve denote the years 1921, 1941, and 1961, with the numbers 1, 2,
and 3 preceding the letters denoting the entry cohorts. The slopes of
all three curves, especially the first, are greater between 1921 and 1941
than in earlier and later years, reflecting the surge in the industry exit
rate after 1922 pictured in the top panel of figure 1.
The survival patterns for the 155 firms in our sample resemble the
patterns in figure 2. By the end of 1920 the firms in the first cohort of
entrants were all at least 15 years old and the firms in the second cohort
were at least 4 years old. Figure 2 indicates that after this point, the
hazard was generally lower the earlier the entry cohort, suggesting a
monotonic relationship between the hazard and the time of entry. To
demonstrate that this pattern holds for the 155 firms in our sample, a
piecewise exponential hazard model is estimated. Let the hazard at time
t of a firm with a vector of characteristics x be denoted as h(tFx), where
t varies from 1921 to 1980. To allow the hazard to vary over time, con-
sistent with the patterns in figures 1 and 2, the period from 1921 to
1980 is divided into intervals. With L denoting the number of intervals,
the hazard is specified as
h(tFx) p exp (a1 I 1 1 a 2 I 2 1 … 1 aLIL 1 b 0 x),
where Ii is an indicator variable equal to one if t is in the ith interval

and zero otherwise, the ai, i p 1, 2, … , L, are coefficients, and b is a
vector of coefficients. This model allows the hazard to vary over time
intervals but constrains the covariates to shift the hazard by the same
proportion in every time interval. In order to balance the number of
exits in each interval, five intervals corresponding to the years 1921–23,
TABLE 5
Effect of Time Period, Entry Year, Location, and Size on the
Hazard of Exit
Variable Model 1 Model 2
Year 1921–23 23.424 22.644
(.338) (.449)
Year 1924–26 23.387 22.574
(.344) (.465)
Year 1927–35 23.113 22.271
(.307) (.440)
Year 1936–45 24.390 23.557
(.455) (.548)
Year 1946–1980 24.753 23.830
(.402) (.524)
Entry year 2 1900 .066 .044
(.017) (.019)
Akron area 2.483
(.208)
Size $1 million and above 2.597
(.307)
Size ! $1 million 2.355
(.227)
Log likelihood 2484.576 2480.046
1924–26, 1927–35, 1936–45, and 1946–80 were chosen.10 The time of

entry is represented by the variable entry year 2 1900. Maximum like-
lihood estimates of this model are reported in table 5 in the column
labeled model 1.11 As expected, the coefficient estimate for entry year
2 1900 is positive and significant, indicating that younger firms had
higher hazards (in every time interval).12 The estimate implies a 7 per-
cent higher hazard for each later year of entry,13 which translates into
10
We experimented with different numbers of intervals and dividing points for the
intervals. This had little effect on the coefficient estimates of the covariates. We also used
the Cox proportional hazards model, which obviates having to specify time intervals for
the hazard. When the method described by Blossfeld and Rohwer (1995, pp. 214–15) was
used to accommodate firms with the same exit dates, the estimates were very similar to
the ones based on the five time intervals.
11
The estimates of this and subsequent hazard models were computed using the program
Stata.
12
We also estimated a model in which entry year 2 1900 was allowed to have a different
effect on the hazard in each time interval. In every period, the coefficient estimate was
positive, as in model 1, and the increase in the log likelihood was not significant. Con-
sequently, we maintained the proportional hazard specification, which economizes on the
number of parameters.
13
The exponential form of the model constrains the variables to affect the hazard
multiplicatively, and the coefficient estimates indicate the multiplicative effect of each
variable. To illustrate, the 7 percent higher hazard for each later year of entry was computed
as follows. The hazard of firms that entered in year t 1 1 can be expressed as
b exp {0.066[(t 1 1) 2 1900]}, where b represents the influence of all other factors in the
nearly a doubling of the hazard for entry 10 years later. Also consistent
with the patterns in figure 2, the coefficient estimates for the last two
time intervals are considerably more negative than for the first three,
indicating a decline in the hazard after 1936.
Thus, when only the time of entry is controlled, the hazard is lower
for earlier entrants. This is consistent with hypothesis 3 in table 1, which
predicts that in the absence of controls for technology, firm age and
location condition the hazard. To analyze the role of location, the 1-0
dummy for firms located within 50 miles of Akron is added as a covariate
to model 1. Two 1-0 size dummies are also added to probe the influence
of size (without controls for technology) on the hazard. The first size
dummy equals one for firms with capitalization of $1 million and above
and the second equals one for all the other firms except the X firms
(with unknown capitalization), which are the omitted group. The co-
efficient estimates of this model are reported in table 5 in the column
labeled model 2. The coefficient estimate of age is reduced but remains
significant at the .05 level and substantial, implying a 5 percent higher
hazard for each later year of entry. The coefficient estimates of the size
variables are both positive and significant at the .05 and .10 levels (one-
tailed). Relative to the omitted group, they imply a 45 percent lower
hazard for firms in the top size category and a 30 percent lower hazard
for firms in the middle size category. The coefficient estimate for the
Akron dummy is negative and significant, indicating that firms located
near Akron had approximately a 40 percent lower hazard. Thus, con-
sistent with hypothesis 3, without controls for technology, earlier en-
trants and firms located near Akron had lower hazards, as did larger
firms.
C. Survival When Technology Is Controlled

While the estimates of model 2 are consistent with the theory, they admit
a number of alternative, nontechnological interpretations. For example,
larger firms might have a greater cash flow or other nontechnological
advantages related to size, Akron firms might have greater access to
skilled labor and machinery, and older firms have more experience, all
of which could contribute to a lower hazard. Fortunately, the predictions
of the theory provide a way of discriminating between the alternative
explanations. Hypothesis 4 in table 2 indicates that once production of
model besides time of entry. This in turn can expressed as
exp (0.066) b exp (t 2 1900) p 1.0682b exp (t 2 1900) ,
where b exp (t 2 1900) is the hazard of firms that entered in period t. Consequently, for
each later year of entry the hazard rises by 6.82 percent, or approximately 7 percent. All
percentage effects reported subsequently were computed similarly.
the cord is controlled, neither age nor location should affect the hazard.
If neither effect persists, it suggests that both were related to technology.
Hypotheses 6 and 7 imply that firm size should have a bigger effect on
the hazard for producers than for nonproducers of the cord. This would
not be expected if size proxied for cash flow or some other nontech-
nological factor. Finally, hypothesis 5 implies that when size is held
constant, firms producing the cord should have a lower hazard, which
provides a direct test of the importance of technology.
To test these predictions of the theory, the three size categories of
$1 million and above, less than $1 million, and the X firms of unknown
size are each divided into two categories according to whether firms
produced the cord tire. This yields six variables. Five are included as
covariates, with X firms not producing the cord the omitted group. Two
1-0 dummies are also used to control for the extensiveness of firm dis-
tribution networks, which allows us to distinguish between technology
and marketing effects. The first dummy equals one for the 51 firms in
Tufford’s (1920) directory that had dealers and distributors in large
cities in various states. The second equals one for the 84 firms not in
Tufford’s directory. If more extensive distribution networks lowered the
hazard and if some fraction of the 84 firms had dealers and distributors
in large cities in multiple states, the coefficients of both variables should
be negative, with the first larger in absolute value than the second.
The coefficient estimates of the model containing the five size/cord
variables, the two distribution variables, and the firm age and location
variables as covariates are presented in table 6 in the column labeled
model 3. The estimates support all the hypotheses predicted by the
theory. For each size class, the coefficient estimates are considerably
more negative for the cord producers, indicating a sharply lower hazard
for cord producers in each size class. Among cord producers, the co-
efficient estimates are considerably more negative for the larger size
categories, indicating that firm size lowers the hazard appreciably among
cord producers. In contrast, among nonproducers of the cord, the co-
efficient estimate for the firms sized $1 million and above is only mod-
estly negative and is less negative than for the intermediate size firms.
This suggests that size has a considerably smaller effect on the hazard
for nonproducers of the cord, with intermediate size nonproducers of
the cord actually having a lower hazard than the largest nonproducers
of the cord. Indeed, even the coefficient estimate of the X sized cord
producers is more negative than coefficient estimates for either of the
two size categories of nonproducers of the cord, indicating that the
smallest cord producers had a lower hazard than nonproducers of the
cord of all sizes. The coefficient estimates of the age and location var-
iables are much less negative than in model 2, with the location coef-
ficient estimate marginally significant at the .10 level (one-tailed) and
TABLE 6
Effect of Technology and Distribution Networks on the Hazard of Exit
Acquisitions Censored
Variable Model 3 Model 4 Model 5 Model 6
Year 1921–23 21.524 21.391 2.912 21.292
(.593) (.513) (.746) (.518)
Year 1924–26 21.420 21.293 2.804 21.147
(.610) (.533) (.766) (.542)
Year 1927–35 21.019 2.964 2.458 2.794
(.606) (.533) (.772) (.548)
Year 1936–45 22.189 22.184 21.686 21.969
(.706) (.673) (.865) (.686)
Year 1946–80 22.402 22.950 22.464 22.695
(.693) (.705) (.887) (.720)
Entry year 2 1900 .027
(.022)
Akron area 2.307
(.217)
Size $1M1, cord 21.290 21.680 22.287
(.501) (.511) (.845)
Size ! $1M, cord 2.978 21.098 21.690
(.442) (.443) (.813)
Size X, cord 2.644 2.768 21.342 2.800
(.473) (.473) (.845) (.474)
Size $1M1, noncord 2.218 2.137 2.050 2.184
(.598) (.597) (.624) (.598)
Size ! $1M, noncord 2.348 2.329 2.325 2.372
(.454) (.456) (.469) (.457)
Distribution network 2.845 2.664 2.735
(.292) (.329) (.337)
No distribution information 2.414 .021 2.105
(.281) (.299) (.314)
Distribution network, cord 2.494
(.375)
Distribution network, noncord 21.284
(.660)
No distribution information, cord .108
(.340)
No distribution information, noncord .463
(.625)
Size $1M1, balloon 22.372
(.679)
Size $1M1, cord, no balloon 21.374
(.530)
Size ! $1M, balloon 21.565
(.654)
Size ! $1M, cord, no balloon 21.107
(.443)
Log likelihood 2472.066 2423.843 2423.333 2421.918
the age coefficient insignificant at conventional levels. Finally, the co-
efficient estimates of both the distribution variables are negative and
sizable and are in the predicted order. These variables were dropped
from the model to probe their influence. The difference in the coef-
ficient estimates of the cord and noncord variables within each size
category actually declined, suggesting that, if anything, distribution net-
works and technology had complementary effects. Omitting the distri-
butional variables did not have much effect on the coefficient estimate
of age, but it did make the coefficient estimate of Akron more negative
(but less negative than in model 2). This suggests that the effect of age
on the hazard is due primarily to technology whereas the effect of
location on the hazard is due to both technology and distribution.
Thus, even with crude controls for technology and distribution, the
estimated effects of age and location are sharply reduced and the es-
timates conform closely with the theory. The magnitude and significance
of the coefficient estimates are evaluated by dropping the age and lo-
cation variables from the model, which attributes their effects to the
other variables. Additionally, acquired firms were treated as censored
exits, acknowledging that they might have survived longer if they had
remained independent.14 The estimates for this model are reported in
table 6 in the column labeled model 4. For each size category, the
difference in hazard rates of producers and nonproducers of the cord
is pronounced. Cord production lowered the hazard by approximately
80 percent in the $1 million and above category and 65 percent and
50 percent in the other two categories, with the effects in the top two
size categories significant at the .01 level and the effect in the bottom
size category significant at the .10 level (one-tailed).15 Among the cord
producers, the $1 million and above firms had a 45 percent lower hazard
than the less than $1 million group, which in turn had a 30 percent
14
Models 1–3 were also reestimated with acquired firms as censored. This had an effect
on the estimates similar to the effects reported below for model 4.
15
To illustrate how these and subsequent percentage reductions and significance levels
were computed, consider the reduction in the hazard from cord production in the $1
million and above size category. The exponential form of the hazard implies that the ratio
of the hazard of cord producers to nonproducers of the cord in the $1 million and above
size category is
exp (21.680)
p exp (21.543) p .21,
exp (20.137)
where 21.680 and 20.137 are the coefficient estimates for producers and nonproducers
of the cord in the $1 million and above size category in model 4. Hence in the $1 million
and above size category, cord production lowered the hazard by 79 percent, or approxi-
mately 80 percent. The standard error of the difference in the coefficient estimates of
21.680 and 20.137 is 0.502. Hence the difference in the two coefficient estimates is 3.073
times the standard error of 0.502, implying that the difference is significantly different
from zero at the .01 level.
lower hazard than the X firms, with the former effect significant at the
.05 level (one-tailed) and the latter effect insignificant. Among the non-
producers of the cord, the differences in hazard rates by size group are
all insignificant at conventional levels and are in the reverse direction
for the top two size groups. When the smallest cord producers are
compared with nonproducers of the cord in the two larger size cate-
gories, the X cord producers had a 45 percent lower hazard than the
$1 million and above firms not producing the cord and a 35 percent
lower hazard than the less than $1 million firms not producing the cord,
with the latter effect significant and the former effect just short of sig-
nificant at the .10 level (one-tailed). The coefficient estimate of the first
distribution variable is significant at the .05 level and indicates about a
50 percent lower hazard for firms with dealers and distributors in large
cities in multiple states. This effect is lower than in model 3, suggesting
that firms without distribution networks were attractive targets for ac-
quisition. The coefficient estimates for the five time intervals indicate
that firms that did not produce the cord and did not have dealers or
distributors in large cities in multiple states had very high hazard rates
in all periods, especially in periods 2 and 3.
The role of distribution networks was probed further by dividing each
of the two distribution variables according to whether firms were cord
producers. The estimates of this model are reported in table 6 in the
column labeled model 5. The coefficient estimates for the main distri-
bution variable (i.e., the variables denoted as distribution network in
table 6) indicate that having dealers and distributors in large cities in
various states decreased the hazard by 72 percent for nonproducers of
the cord versus only 39 percent for cord producers. This suggests that
more extensive distribution networks were especially important for sur-
vival for firms that were not at the technological frontier. The log like-
lihood of model 5, however, is not significantly greater than that of
model 4, indicating that stratification of the distribution variables by
cord production did not significantly improve the fit of the model.
To test further the importance of technology for survival, the infor-
mation about the first firms to produce the cord and balloon tires in
the September 1917 and October 1923 issues of the Tire Rate Book was
exploited. First, a 1-0 dummy equal to one for the eight cord producers
listed in the September 1917 issue was added to model 4. Its estimated
coefficient was negative, significant, and sizable, implying a 74 percent
lower hazard for the eight early cord producers (the other coefficient
estimates were similar to those in model 4). Second, the information
on the first 21 balloon producers in the October 1923 issue was used
to divide the top two size categories of cord producers in model 4 into
16
four categories according to whether firms produced the balloon. The
estimates of this model are reported in table 6 in the column labeled
model 6. Similarly to the effects of cord production on the hazard, for
each size category the hazard is appreciably lower for the balloon pro-
ducers, size reduced the hazard considerably more for the balloon pro-
ducers than for the non–balloon producers, and the smaller balloon
producers had a lower hazard than the larger nonproducers.17 Thus
early production of the cord and balloon further lowered the hazard,
especially among the larger firms in the case of the balloon, as the
theory would suggest.
D. Persistence of the Effects of Technology

If early cord production is a proxy for innovative firms and relative firm
sizes do not change greatly over time, the theory predicts that 1920 cord
production and firm size should have similar effects on the hazard in
the near and far term. Alternatively, theories that attribute the shakeout
to a single innovation or a triggering event suggest that 1920 cord pro-
duction and firm size would have less effect on the hazard over time.
To analyze the effects of cord production on the hazard over time, the
five time periods over which the hazard was allowed to vary in model
4 were collapsed to two periods and the coefficient estimates were al-
lowed to vary over the two time periods. The first period covers the
years 1921–30 and the second the years 1931–80. The bottom two size
classes had to be combined because all size X firms that did not produce
the cord in 1920 exited by 1931. This reduced the number of explan-
atory variables to five: the two distribution variables, size $1 million and
above cord producers, size $1 million and above nonproducers of the
cord, and cord producers of size less than $1 million, with the omitted
group nonproducers of the cord of size less than $1 million. To provide
a benchmark, the model was estimated with the coefficients in the two
time periods constrained to be equal and then allowed to vary. The first
coefficient estimates are reported in table 7 in the column labeled model
7 and the second set in the column labeled model 8.
When the coefficient estimates of model 7 are compared with those
of model 4, the estimates are similar. Cord producers had considerably
lower hazard rates than nonproducers of the cord of comparable size,
size lowered the hazard only for producers of the cord, the smallest
16
All but one of the balloon producers fell into these two categories, and the one
exception exited in 1925. To attribute survival to balloon production rather than to the
fact that the balloon producers all survived to October 1923, cord producers that eventually
produced balloon tires were coded as cord producers through 1923 and balloon producers
thereafter.
17
The fit of the model, however, was not significantly improved relative to model 4.
TABLE 7
Effect of Size, Cord Production, Distribution Networks on the
Hazard of Exit by Time Period
Acquisitions Censored
Variable Model 7 Model 8
Year 1921–30 21.543 21.671
(.317) (.343)
Year 1931–80 22.339 2.814
(.407) (.971)
Size $1M1, cord 21.373
(.329)
Size $1M1, cord, 0–10 21.244
(.385)
Size $1M1, cord, 101 22.227
(.744)
Size X and ! $1M, cord 2.660
(.209)
Size X and ! $1M, cord, 0–10 2.618
(.223)
Size X and ! $1M, cord, 101 21.499
(.694)
Size $1M1, noncord .238
(.447)
Size $1M1, noncord, 0–10 .058
(.489)
Size $1M1, noncord, 101 1.309
(1.119)
Distribution network 2.720
(.329)
Distribution network, 0–10 2.478
(.354)
Distribution network, 101 22.104
(.849)
No distribution information .045
(.295)
No distribution information, 0–10 .115
(.320)
No distribution information, 101 2.491
(.763)
Log likelihood 2433.880 2430.901
producers of the cord had a lower hazard than the largest nonproducers,
and firms with more extensive distribution networks had lower hazards.
The estimates of model 8 indicate that the qualitative effects of size,
cord production, and distribution are similar in the two periods 1921–30
and 1931–80. Quantitatively they are consistently larger in the later
period, although not surprisingly the standard errors of the coefficient
estimates are larger for the later period and the log likelihood of model
8 is not significantly greater than that of model 7. Consistent with the
theory, the estimates suggest that 1920 cord production and firm size
persistently affected the hazard in both the near and far term. By 1931
all firms produced the cord/balloon tire, and initial problems with the
balloon had been largely overcome. The fact that 1920 cord production
affected the hazard comparably after as well as before 1931 suggests
that, consistent with the theory, cord production in 1920 was as much
a measure of overall firm technological progressiveness as progressive-
ness regarding the cord technology.
V. Discussion
Similarly to studies of many other industries, our estimates indicate that
the age and size of tire producers appreciably affected their survival
prospects. Indeed, the tire industry was ultimately dominated by some
of its earliest entrants, and few firms that entered after its shakeout
commenced survived very long. It also became concentrated geograph-
ically around Akron, and our estimates indicate that locating near the
geographic center of the industry also enhanced survival.
Many reasons have been proposed for the greater survival of older
and larger firms. Our data on the state of firms just prior to the start
of the severe shakeout in tires provided a distinctive opportunity to
explore the pathways through which age, size, and also location oper-
ated. They clearly point toward technology as the key factor conditioning
the link between firm survival and age, size, and location. Larger firms
were more likely to be at the technological frontier, which contributed
to a lower hazard, and among firms at the frontier, greater size con-
tributed to a lower hazard. The much smaller effects of firm size on the
hazard among firms not at the technological frontier suggest that it was
technology rather than other aspects of larger firms that contributed
to their lower hazard. Similarly, the sharp decline in the effect of age
on the hazard when cord production and size were controlled suggests
that older firms had lower hazards primarily because they were larger
and more likely to be at the technological frontier. In terms of the
agglomeration economies apparent near Akron, both technology and
the extensiveness of firm distribution networks had to be controlled to
account for the lower hazard of the Akron firms. This suggests that the
agglomeration economies were also (partially) related to technology.
The theoretical model developed in Klepper (1996a, 1996b) featuring
dynamic increasing returns from R & D, heterogeneity in firm capa-
bilities, and intensifying selection forces over time provides a way of
interpreting these findings. It also provides a way of linking the firm
survival results to the determinants of market structure and the partic-
ular evolution of the tire industry. If cord production in 1920 is inter-
preted as a measure of overall technological progressiveness, consistent
with the estimates of model 8, then the firm survival patterns support
the model’s characterization of the shakeout and corresponding rise in
market concentration as the result of increasing returns associated with
R & D.
Jovanovic and MacDonald (1994) have proposed an alternative char-
acterization of shakeouts that also features technological change. In
their model, an exogenous technical development triggers the shakeout.
It opens up opportunities that are challenging to adopt and increase
the optimal size firm. It may induce entry initially, but eventually it leads
to exit of firms that cannot master the new technology. The rise in the
optimal size firm ultimately spells a smaller equilibrium number of pro-
ducers and thus a shakeout. To demonstrate the applicability of their
model, Jovanovic and MacDonald apply it to tires, identifying the Ban-
bury mixer as the triggering innovation. The Banbury mixer was in-
novated in 1916 by a supplier to the industry. It took at least a few years
for it to be perfected, so its timing as a trigger to the shakeout is suitable.
Our findings concerning the relationship between the hazard and
cord production as of 1920 suggest that if the shakeout were triggered
by any innovation, the cord tire would be a better candidate than the
Banbury mixer. Cord production in 1920 lowered the subsequent hazard
by 50–80 percent depending on the size of the firm, and early produc-
tion of the balloon tire lowered the hazard further. This suggests that
cord/balloon production was of great competitive significance at the
start of the shakeout and conceivably could have played the role of the
triggering innovation in the Jovanovic and MacDonald theory. In many
ways the cord/balloon tire innovation is a superior candidate for the
triggering innovation than the Banbury mixer. The Banbury mixer was
developed by a supplier to the industry that helped firms adapt their
production process to incorporate it (Killeffer 1962). It came in multiple
sizes to accommodate firms of different size, and its effects were confined
to only one of the five major stages in the production process (Stern
1933).18 In contrast, the cord tire was quite challenging to adopt suc-
cessfully: it required many innovations for it to diffuse, and judging
from the increases in market share captured by its leading innovators,
Goodyear and Firestone (Allen 1949, pp. 37–40; Lief 1951, pp. 103–5),
it had considerable competitive ramifications.
While the cord/balloon tire may have been a better candidate than
the Banbury mixer to trigger the shakeout, the nature of the cord and
balloon tire innovations and some of our findings regarding the hazard
question whether the shakeout was triggered by the cord or any other
single innovation. The cord was not one innovation but many innova-
tions, culminating in a breakthrough innovation, the balloon tire. Thus
it is better to think of the cord as a trajectory of innovations rather than
18
Moreover, it was adopted by producers of other rubber products without any apparent
effect on the number of producers of these products.
a single, triggering innovation. Befitting a trajectory of innovations, it
took quite a while for the cord to diffuse among users, and it was over
10 years after the introduction of the cord that the shakeout began.
Thus it is hard to think of the cord as being sufficiently concentrated
in time to be a trigger for the shakeout. Moreover, the fact that the
hazard of exit was related to 1920 cord production similarly for the
period after 1930 as for 1921–30 suggests that 1920 cord production
may have been a proxy for general technological progressiveness rather
than simply proficiency in the cord technology. If so, then it implies
that firm survival during and after the shakeout was not merely depen-
dent on keeping up with cord technology but with technological change
generally. This would be consistent with the numerous technological
changes that characterized the tire industry in the 1910s and 1920s and
the persistent leadership of the largest firms in the major innovations
of the industry (see Warner 1966, pp. 268–70). If keeping up with tech-
nological change generally was key to firm survival during the shakeout,
it further belies the notion that the shakeout was triggered by a partic-
ular innovation.
Our finding that having dealers and distributors in large cities in
multiple states enhanced survival suggests that technology was not the
whole story behind the shakeout in the industry or its evolution toward
oligopoly. Indeed, Knox (1963) attributed the shakeout and subsequent
rise in concentration in tires to changes in marketing methods brought
about by Sears, Roebuck, Montgomery Ward, and other mass marketers.
Our findings about the importance of early cord and balloon production
for survival suggest, however, that changes in distribution methods were
by no means the sole or even main factor contributing to the shakeout
or rising concentration. Moreover, the shakeout was already significantly
under way by the time of the landmark contract in 1926 between Sears
and Goodyear, which Knox (1963, pp. 157–58) cited as the defining
event triggering the shakeout. Furthermore, the advent of the mass
marketers should have provided a distribution outlet to smaller pro-
ducers and thus reduced the importance of distribution networks for
survival.19 It seems likely, though, that firms not at the technological
frontier would have been foreclosed from selling to the mass distributors
because of their higher costs and lower quality, in which case the move
to mass distributing methods in the 1920s and 1930s might have has-
tened their demise. This would help explain our finding (in model 5)
that having dealers and distributors in large cities in multiple states
enhanced survival considerably more for nonproducers than for pro-
ducers of the cord tire.
19
Indeed, originally Sears bought its tires from three small firms before turning to
Goodyear (French 1986, p. 39).
One factor that was not mentioned at all in the empirical analyses is
scale economies in production. They are posited in the theoretical
model but are assumed to be exhausted after a minimum size of firm.
Estimates of production scale economies in tires suggest that the firm
with the minimum efficient size was in fact very small relative to the
size of the market (Reynolds 1938; Bain 1956). Thus it seems unlikely
that production scale economies played a key role in the evolution of
the market structure of the industry. In that sense, our results accord
with more general findings (Bain 1956; Scherer et al. 1975) that pro-
duction scale economies cannot explain much of the cross-sectional
variation in market structure.
VI. Conclusion
The U.S. automobile tire industry is a microcosm of a larger debate on
the determinants of market structure. It experienced an initial buildup
in the number of firms that reached a peak of 274 firms after the industry
was approximately 25 years old. Subsequently entry dwindled, the num-
ber of firms declined sharply to less than 20 percent of the peak within
14 years, the four-firm concentration rose markedly, and the industry
evolved to be a tight oligopoly. A number of hypotheses featuring al-
ternative determinants of market structure have been proposed to ex-
plain these patterns.
We focused on the ability of the theory developed by Klepper (1996a,
1996b) to explain not only the evolution of the market structure of the
industry but also firm technology choices and survival patterns. Dis-
tinctive predictions were derived regarding how the age and size of
firms conditioned technological advance and how in turn age, size, and
location interacted with technology status to condition survival. The
predictions were tested using data for 155 firms on size, location, tech-
nology, and distribution networks just prior to the start of the industry’s
shakeout coupled with the time of entry and time and type of exit of
each firm. The tests suggest that technological change played a key role
in conditioning firm survival. The industry was ultimately dominated by
a few early entrants, and long-term survival rates were considerably
greater for earlier entrants. Consistent with the theoretical model, older
and larger firms were found to be closer to the technological frontier,
which enabled them to survive longer. Firms located around Akron,
Ohio, the geographic center of the industry, were also found to be closer
to the technological frontier, which contributed to their longer survival.
The findings concerning firm age, size, technology choices, and sur-
vival provide support for increasing returns stemming from technolog-
ical change as a potent force shaping industry market structure. Theories
featuring increasing returns from technological change have been pro-
posed in recent years to explain the cross-sectional link between average
firm R & D spending as a fraction of sales and market concentration
(Dasgupta and Stiglitz 1980; Nelson and Winter 1982) and the rela-
tionship within industries between firm size and R & D spending (Co-
hen and Klepper 1996a, 1996b). Embedding increasing returns from
R & D in an evolutionary model, Klepper (1996a) demonstrated that
a number of empirical regularities in the evolution of new industries
could also be explained with such a theory, and Klepper (1996b) and
Klepper and Simons (1997) showed that such a theory can explain a
number of regularities in industries, including tires, that experienced
severe shakeouts. The analysis of the tire industry provided a much
sharper test of the role of increasing returns from technological change
in shaping the evolution of market structure. While technological
change was not the only force shaping the way the tire industry evolved,
increasing returns associated with technological change appear to have
had a major influence on firm survival and the emergence of the in-
dustry as an oligopoly.
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The Making of an Oligopoly: Firm Survival and

Technological Change in the Evolution of the

[Journal of Political Economy, 2000, vol. 108, no. 4]

II. The Early Tire Industry1

Fig. 1.—Entry, exit, and number of tire producers, 1905–80

B. Implications of the Model

localization of knowledge spillovers (Jaffe, Trajtenberg, and Henderson

IV. Hypothesis Tests

Size (Million $) Percentage

Fig. 2.—Survival of firms by entry cohort

B. Survival without Controls for Technology

h(tFx) p exp (a1 I 1 1 a 2 I 2 1 … 1 aLIL 1 b 0 x),

where Ii is an indicator variable equal to one if t is in the ith interval

1924–26, 1927–35, 1936–45, and 1946–80 were chosen.10 The time of

C. Survival When Technology Is Controlled

D. Persistence of the Effects of Technology

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