Product Cycle

One of the more influential theories in economic geography in the mid 20th century was the product cycle, which integrated the supply and demand dimensions of corporate behavior and locations as they changed systematically over time. This view posits an idealized sequence in which goods move from being newly introduced innovations to becoming more widely accepted, until they finally reach a “mature” status. Different stages in the product cycle are associated with different market conditions, varying organization of production, and changes in geographic locations.

Drawing on the perspectives of innovation adoption widely used in marketing, this view begins with the changing nature of demand for a firm's product over time, which is typically a bell-shaped curve, with new innovations adopted by a small group of risk takers. Adopters tend to be younger, more educated, and trendier than the population as a whole. As the product becomes better known and more widely accepted, larger numbers of more risk-adverse people will adopt it, sales increase, the market expands, and the firm can be confident of a consistent stream of future revenues. Finally, when the product becomes widely known, rates of new purchases will slow down as the market becomes saturated.

As the product proceeds through its cycle, the supply conditions change accordingly. With new innovations, where the information content is high, firms must expend considerable sums for research and development. Firms with monopolies over the production of products in their early years (e.g., as patent holders) may enjoy [Page 2296]superprofits for a limited time. Such companies tend to be relatively small, use higher proportions of skilled labor, and face a great deal of uncertainty in the market. Because they must produce in relatively small quantities, they are not likely to enjoy economies of scale and compete more on the basis of quality than price. Small firms in the early stages of the product cycle accept the market price—that is, they are price takers rather than price setters. As the product becomes more widely adopted and the market expands, firms can shift to producing larger quantities, standardizing the production process. As larger firms outcompete the smaller ones, the industry becomes more capital intensive in nature and more reliant on economies of scale, and the market becomes increasingly oligopolistic. Often, this transition is accompanied by a process of vertical integration, in which different stages of the production process become incorporated “in-house,” within the firm.

Raymond Vernon offered a series of geographic correlates for different stages of the product cycle. The original analysis was framed at the international scale, although subsequent ones extended this approach to national and regional ones. Thus, in the early stages of the product cycle, firms tend to prefer locations close to large pools of skilled labor, typically in economically developed countries. In subnational modifications of the product cycle, the optimal locations are in the cores of metropolitan regions, where firms can take advantage of agglomeration economies and dense networks of specialized contacts and information. Spatial cores are thus “seedbeds” of innovation. At the national scale, such locations were found in the traditional northeastern-midwestern Manufacturing Belt. As the product moves through the cycle, and the production process becomes more capital intensive, the need for centralized locations declines, and firms can relocate to the metropolitan periphery or, in the context of the national space of the United States, to the Sunbelt. Core regions are left to begin a new cycle of production by innovating in skilled, labor-intensive goods. Thus, the product cycle leads to the hypothesis that the decentralization of manufacturing is accompanied by the process of capital intensification as oligopolistic firms spin off their branch plants to peripheral locations in their search for cheaper and less skilled labor. At the international scale, this process leads to multinational corporations investing in developing countries. This perspective sustains the view that exports from regions with comparative advantages early in the product cycle should be relatively labor intensive, while those with advantages later in the cycle should be more capital intensive. As product cycles play out continually over the landscape, markets will reproduce uneven development, in contrast to expectations that the free flow of labor and capital would result in a convergence of economic growth among regions.

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