The transition of the Japanese keiretsu in the changing economy

This paper applies an evolutionary game model to link an economy's environment with the organizational choices made by firms operating inside of that specific environment in a dynamic framework. Applying this to the economies of Japan and the US in the 1980s and 1990s, it was shown that the structure in the 1980s could not last in which the keiretsu system dominated in Japan and the traditional American system dominated in the US Our model predicts an interior equilibrium, i.e., the coexistence of both systems in the US and Japan. Moreover, this equilibrium is reached only by a combination of very weak keiretsu network, a drop of demand in Japan, and a partially opened input market. The results offer an explanation for why the transition from the 1980s equilbrium to the 1990s equilibrium took so long. (C) 2004 Elsevier Inc. All rights reserved.