Submarket dynamics and innovation: the case of the US tire industry

Beginning in 1922, the rate of exit of US tire producers increased sharply and the industry began a severe and protracted shakeout. Just 5 years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and, in the process, reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.