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Evaluating Market Attractiveness: Individual Incentives Versus Industry Profitability

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  • Herbert Dawid

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  • Marc Reimann

Abstract

In this paper, we employ an agent-based industry simulation model to study the effects of the interplay between individual firms’ market evaluation strategies on the extent of product innovations and overall industry development. In particular, we show that a homogenous industry consisting of companies with focus on historical profits yields high overall industry profits but is very unstable. The introduction of a single firm oriented towards market growth rather than profits is sufficient to trigger a severe drop in profits and a transformation towards an industry with strong market growth orientation and a large number of marketed product innovations. Furthermore, we show that the degree of horizontal differentiation of product innovations from existing products is of significant importance for the individual incentives to adopt market growth orientation and the effects of such a development on overall industry profits. Copyright Springer Science + Business Media, Inc. 2005

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 24 (2005)
Issue (Month): 4 (June)
Pages: 321-355

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Handle: RePEc:kap:compec:v:24:y:2005:i:4:p:321-355

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Web page: http://www.springerlink.com/link.asp?id=100248
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Related research

Keywords: agent-based simulation; innovation dynamics; market attractiveness JEL codes: D83; L11; O32;

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References

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  1. Fagiolo, Giorgio & Dosi, Giovanni, 2003. "Exploitation, exploration and innovation in a model of endogenous growth with locally interacting agents," Structural Change and Economic Dynamics, Elsevier, vol. 14(3), pages 237-273, September.
  2. Javier Pajares & Adolfo L�pez-Paredes & Cesáreo Hern�ndez-Iglesias, 2003. "Industry As an Organisation of Agents: Innovation and R&D Management," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 6(2), pages 7.
  3. Malerba, Franco, et al, 1999. "'History-Friendly' Models of Industry Evolution: The Computer Industry," Industrial and Corporate Change, Oxford University Press, vol. 8(1), pages 3-40, March.
  4. Klepper, Steven, 1997. "Industry Life Cycles," Industrial and Corporate Change, Oxford University Press, vol. 6(1), pages 145-81.
  5. Cantner, Uwe & Pyka, Andreas, 1998. "Absorbing Technological Spillovers: Simulations in an Evolutionary Framework," Industrial and Corporate Change, Oxford University Press, vol. 7(2), pages 369-97, June.
  6. Jovanovic, Boyan & MacDonald, Glenn M, 1994. "The Life Cycle of a Competitive Industry," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 322-47, April.
  7. Herbert Dawid & Marc Reimann, 2011. "Diversification: a road to inefficiency in product innovations?," Journal of Evolutionary Economics, Springer, vol. 21(2), pages 191-229, May.
  8. Murat Yildizoglu, 1999. "Competing R&D Strategies in an Evolutionary Industry Model," Working Papers of BETA 9914, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  9. Giulio Bottazzi & Giovanni Dosi & Marco Lippi & Fabio Pammolli & Massimo Riccaboni, 2001. "Innovation and Corporate Growth in the Evolution of the Drug Industry," LEM Papers Series 2001/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. Malerba, Franco, 1992. "Learning by Firms and Incremental Technical Change," Economic Journal, Royal Economic Society, vol. 102(413), pages 845-59, July.
  11. Silverberg, Gerald & Verspagen, Bart, 1994. "Collective Learning, Innovation and Growth in a Boundedly Rational, Evolutionary World," Journal of Evolutionary Economics, Springer, vol. 4(3), pages 207-26, September.
  12. JS Armstrong & Roderick J. Brodie, 2004. "Effects of Portfolio Planning Methods on Decision Making: Experimental Results," General Economics and Teaching 0412016, EconWPA.
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  14. Beardsley, George & Mansfield, Edwin, 1978. "A Note on the Accuracy of Industrial Forecasts of the Profitability of New Products and Processes," The Journal of Business, University of Chicago Press, vol. 51(1), pages 127-35, January.
  15. Jan Fagerberg, 2003. "Schumpeter and the revival of evolutionary economics: an appraisal of the literature," Journal of Evolutionary Economics, Springer, vol. 13(2), pages 125-159, 04.
  16. Dawid, Herbert, 2006. "Agent-based Models of Innovation and Technological Change," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 25, pages 1235-1272 Elsevier.
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Cited by:
  1. Herbert Dawid & Marc Reimann, 2011. "Diversification: a road to inefficiency in product innovations?," Journal of Evolutionary Economics, Springer, vol. 21(2), pages 191-229, May.
  2. Giorgio Fagiolo & Paul Windrum & Alessio Moneta, 2006. "Empirical Validation of Agent Based Models: A Critical Survey," LEM Papers Series 2006/14, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Klaus Wersching, 2007. "Agglomeration in an innovative and differentiated industry with heterogeneous knowledge spillovers," Journal of Economic Interaction and Coordination, Springer, vol. 2(1), pages 1-25, June.

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