Exploitation Versus Exploration in Market Competition

Abstract

A general simulation model of market competition is developed to explore the effectiveness of and interactions between different types product exploration and exploitation strategies i.e. innovation, imitation and process improvement. The model, like real markets, is highly non-linear such that analytical solutions in the form of optimal marketing strategies are not possible. Hence, we use simulation experiments to examine firm survival and the effectiveness of different strategy mixes and show how these depend on the length of time it takes for each strategy to bear fruit, the speed of new product diffusion and the duration of product life cycles and the timing of new product entry. The model is implemented on the Internet and provides the basis for further experiments to examine the impact of different combinations of firm strategies on survival and performance and as a means of honing management sensitivities regarding the impact of different market response functions on the outcomes of strategy.