Abstract: The Emergence of High Sunk Costs Industries: Market Structure, Entrepreneurship, and Technological Change in Services, 1750–2000

Gerben Bakker

Abstract

This paper investigates how long-run technological change and productivity growth in service industries differ from manufacturing by linking qualitative and quantitative approaches from management science (organisation level), industrial economics (industry level), and economic history (long-run productivity effect on the economy). It hypothesises that some services can be "industrialised," and that this coincides with a sharp rise in sunk costs (such as R&D or advertising), market size, and productivity, a shift from process to product innovations, and the replacement of "typical," "representative" firms by a few historically specific quasi-unique entrepreneurial firms with decisively large market shares. Because of inadequate measurement and industry/market definition, this industrialisation of services and the attendant productivity and welfare gains have not sufficiently been identified. The analysis of the shift from a fragmented to a highly concentrated industry structure also provides insights into the historical role of entrepreneurship in new industries and the Schumpeterian process of creative destruction. A process of entrepreneurial discovery led a few "smart" entrepreneurs to massively escalate their sunk outlays. The paper makes a beginning with empirical tests by investigating the entertainment and pharmaceutical industries in some detail, and by briefly discussing relevant aspects of the telecommunications, transport, and domestic services industries.