Functional Demand Satiation and Industrial Dynamcis - The Emergence of the Global Value Chain for the U.S. Footwear Industry

Abstract

Around 1940 Schumpeter draws on an analysis of the U.S. footwear industry as an exemplar case to formulate his famous hypothesis about the positive relation between market concentration and innovative activity. Starting in the 1970s the value chain of U.S. footwear producers disintegrates, eventually separating the process of product innovation from manufacturing in this industry. Studies testing Schumpeter’s hypothesis commonly do not account for the modularity and globalization of an industry’s value chain. Schumpeter having neglected the demand side in his theorizing, we argue that the separation of product innovation and manufacturing in the U.S. footwear industry is influenced by functional satiation effects on demand. If the functional requirements of consumers are met, their willingness to pay for ever more product varieties decreases. Since the early 1970s the ‘oversupply’ of new product varieties and the simultaneously decreasing price level drive market growth beyond functional satiation (Frenzel Baudisch, 2006b). In this paper we argue that this simultaneous price and innovation competition separates the product innovation process from manufacturing to gain economies in both of these processes simultaneously. Discussing the consumers’ motivations to buy products beyond their functional requirements offers a deeper qualitative understanding of the business practices revealed in the historical case of the U.S. footwear industry.Industrial organization, Schumpeter hypothesis, Modular Value Chain, Consumer Behavior, Footwear Industry