The general density dependence model can be
applied to explain the founding of specialist firms
(those attempting to serve a narrow target market).
According to this model, specialist foundings hinge on
the interplay between legitimation and competitive
forces, both of which are functions of the density (total
number) of firms in a particular specialist population.
Legitimation occurs as a new type of firm moves from
being viewed as unfamiliar to being viewed as a natural
way to organize. At low density levels, each founding
increases legitimation, reducing barriers to entry and
easing subsequent foundings. Competition occurs
because the resources that firms seek--customers
, suppliers, and employees--are limited, but as long as
density is low relative to plentiful resources, the
addition of another firm has a negligible impact on the
intensity of competition. At high density levels,
however, competitive effects outweigh legitimation
effects, discouraging foundings. The more numerous
the competitors, the fiercer the competition will be and
the smaller will be the incentive for new firms to enter
While several studies have found a significant
correspondence between the density dependence
model and actual patterns of foundings, other studies
have found patterns not consistent with the model. A
possible explanation for this inconsistency is that
legitimation and competitive forces transcend national
boundaries, while studies typically restrict their
analysis to the national level. Thus a national-
level analysis can understate the true legitimation and
competitive forces as well as the number of foundings
in an industry that is internationally integrated. Many
industries are or are becoming international, and since
media and information easily cross national borders, so
should legitimation and its effects on overseas
foundings. For example, if a type of firm becomes
established in the United States, that information
transcends borders, reduces uncertainties, and helps
foundings of that type of firm in other countries. Even
within national contexts, studies have found more
support for the density dependence model when they
employ broader geographic units of analysis--for
example, finding that the model's operation is seen
more clearly at the state and national levels than at city
The passage suggests that when a population of specialist firms reaches a high density level, which of the following is likely to occur?
(A) Foundings will decline despite legitimation that has occurred in these industries.
(B) Increasing competition will encourage many firms to broaden their target market.
(C) Competition for resources will become stabilized and thus foundings will be encouraged.
(D) Many customers will abandon their loyalty to older firms as more innovative firms enter the market.
(E) Firms will begin to cross national borders in an attempt to gain a competitive advantage.
The primary purpose of the passage is to
(A) question the validity of an economic model
(B) point out some inconsistencies within an economic model
(C) outline an economic model and suggest revisions to it
(D) describe an economic model and provide specific examples to illustrate its use
(E) explain why an economic model remains valid despite inconsistent research results
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