Organisation of Industry and Innovation Dynamics

Abstract

The paper aims at investigating how the organization and performances of a certain industry evolves once competition among firms is modelled as the intertwining of innovative search and organizational change. In order to take the full roster of participants into account, and to retain the inner complexity of their decisions, a Pseudo-NK model is built - up in which a population of firms is called to match an ever changing technological frontier which pose to them a periodical trade- off between the opportunity of saving on costs and advancing their technology.

The simulation model offers interesting insights on the various patterns of vertical scope of the firms and of the resulting market dynamics. Results from previous literature are confirmed, highlighting, for instance, the need for firms high tech sectors (and particularly in early stages of the industry life-cycle) to vertically integrate in order to have chances to successfully face the turmoil in the market leading to a schumpeterian kind of competitive outcome. On the contrary, in late stages (and more markedly with mature technologies) deverticalization allows for better performances, also favoured by a more stable kind of competitive outcome of the market. These results appears to be quite robust, also in the face of different types of technological shocks that the firms face (i.e. both competence - enhancing and competence - destroying), while if suppliers are allowed to innovate, they are more likely to lock the market in sub-optimal configurations.

Keywords: product innovation, modularity, industrial dynamics, agent-based simulations, search strategy, complexity

JEL Classification: L22, O32, O33