Two Faces of Decomposability in Search: Evidence from the Recorded Music Industry 1995-2015

Abstract

We propose that decomposability may generate a trade-off across different stages of search. We compare (1) a decomposed search—the process of searching by producing a decomposed module, and (2) an integrated search—the process of searching by producing a full-scale product. In the variation generation stage, decomposability can allow firms to simultaneously experiment with more alternatives than an integrated search. However, in the selection and retention stages, a decomposed search may be more vulnerable to imperfect evaluation (i.e., noise) than an integrated search because a larger number of promising alternatives could be missed after the initial evaluation. The rationale behind this statement is that (1) more alternatives will face an unlucky draw in their initial evaluation, and (2) a decomposed search results in a higher performance target for giving a second production chance than that of an integrated search. We test our theory with a unique empirical setting, the recorded music industry, where singles (i.e., decomposed products) and albums (i.e., integrated products) have coexisted since the early twentieth century. In the variation generation stage, single-producing firms experiment with 35.22% more new artists than album-only-producing firms. In the selection and retention stage, single-producing firms are 58.89% more likely to neglect top-tier artists who failed in their first releases. Approximately 80% of the increase in neglecting top-tier artists came from the increases in the number of new artists experimented with (because of single production), and the other 20% of the increase came from a higher performance target.

Keywords: Decomposability, Evolutionary Perspective on Search, Behavioral Theory of the Firm, Alternative Evaluation

JEL Classification: L82, L86, M13, M51, O30