franco malerba, richard nelson, luigi orsenigo and sidney winter

INDUSTRIAL POLICIES IN A INDUSTRIAL POLICIES IN A HISTORY-FRIENDLY MODEL OF THE HISTORY-FRIENDLY MODEL OF THE CO-EVOLUTION OF THE COMPUTER CO-EVOLUTION OF THE COMPUTER

AND SEMICONDUCTORS AND SEMICONDUCTORS INDUSTRIES INDUSTRIES

Franco Malerba, Richard Nelson, Luigi Franco Malerba, Richard Nelson, Luigi Orsenigo and Sidney WinterOrsenigo and Sidney Winter

L. Orsenigo, Pecs, july 2009L. Orsenigo, Pecs, july 2009

►The analysis of the effects of industrial The analysis of the effects of industrial policies is often based on static, policies is often based on static, equilibrium models, with agents equilibrium models, with agents characterized by complete rationality. characterized by complete rationality. Moreover, such analyses consider in Moreover, such analyses consider in most cases, one specific industry, most cases, one specific industry, without fully taking into account the without fully taking into account the effects that public intervention might effects that public intervention might bear on related industriesbear on related industries

L. Orsenigo, Pecs, july 2009

growing literature on industrial growing literature on industrial dynamics, with heterogeneous agents, dynamics, with heterogeneous agents, increasing returns and path-increasing returns and path-dependencydependency

►even within this literature, policy even within this literature, policy implications have been by and large implications have been by and large neglected, particularly as formal neglected, particularly as formal models are concerned.models are concerned.


AntecedentsAntecedents

►The Schumpeterian trade-offThe Schumpeterian trade-off►Network externalitiesNetwork externalities►Blind Giants, Narrow Windows and Blind Giants, Narrow Windows and

Angry OrphansAngry Orphans


Microsoft case Microsoft case

► competition is not competition is not withinwithin the market, but the market, but forfor the the market: temporary monopolies, provided that market: temporary monopolies, provided that the entry of new potential monopolists offering the entry of new potential monopolists offering potentially superior new technologies is not potentially superior new technologies is not blockaded. blockaded.

► Thus, antitrust policies should consider not only Thus, antitrust policies should consider not only the immediate effects of the existence of a the immediate effects of the existence of a monopolist and of its actions but also the monopolist and of its actions but also the predictions of alternative possible futures predictions of alternative possible futures (which might be very hard to predict indeed) (which might be very hard to predict indeed)


►efficacy of alternative policy measures efficacy of alternative policy measures designed to combat monopoly (if designed to combat monopoly (if deemed appropriate on efficiency and deemed appropriate on efficiency and political grounds), to promote industry political grounds), to promote industry growth and technological change. growth and technological change.

►In general, little is known about the In general, little is known about the efficacy of industrial policies in efficacy of industrial policies in dynamically related, co-evolving dynamically related, co-evolving industries.industries.


AimsAims

► Exploring the effects of alternative policies Exploring the effects of alternative policies on the dynamics of two vertically-related on the dynamics of two vertically-related industries in changing and uncertain industries in changing and uncertain technological and market environments. technological and market environments.

► “ “make or buy” decisions make or buy” decisions ► dynamics of market concentration in dynamics of market concentration in

contexts characterized by periods of contexts characterized by periods of technological revolutions punctuating technological revolutions punctuating periods of relative technological stability periods of relative technological stability and smooth technical progress. and smooth technical progress.


History-Friendly ModelsHistory-Friendly Models

► CLOSER RELATIONSHIP WITH HISTORICAL AND CLOSER RELATIONSHIP WITH HISTORICAL AND EMPIRICAL ANALYSISEMPIRICAL ANALYSIS

► INDUSTRY-SPECIFICITIESINDUSTRY-SPECIFICITIES► PUT MORE RESTRICTIONS ON MODELSPUT MORE RESTRICTIONS ON MODELS► DERIVE TIME-PATHS, NOT “SIMPLY” LIMIT DERIVE TIME-PATHS, NOT “SIMPLY” LIMIT

PROPERTIESPROPERTIES► FORMALIZE AN APPRECIATIVE ARGUMENTFORMALIZE AN APPRECIATIVE ARGUMENT► REPRODUCE A QUALITATIVE HISTORY: PROBING A REPRODUCE A QUALITATIVE HISTORY: PROBING A

THEORY, NOT REPRODUCING REAL TIME SERIESTHEORY, NOT REPRODUCING REAL TIME SERIES► BASIS FOR GENERALIZATIONSBASIS FOR GENERALIZATIONS► TOOL FOR THEORETICAL, “HISTORY-FREE” TOOL FOR THEORETICAL, “HISTORY-FREE”

INVESTIGATIONINVESTIGATION


VERTICAL INTEGRATION AND VERTICAL INTEGRATION AND SPECIALIZATION: THE CONCEPTUAL SPECIALIZATION: THE CONCEPTUAL

APPROACHAPPROACH

► Differences in firms’ capabilities and role played by the Differences in firms’ capabilities and role played by the nature of the knowledge base in an industry. nature of the knowledge base in an industry.

► Through learning firms accumulate over time capabilities in Through learning firms accumulate over time capabilities in specific technological, productive and market domains. specific technological, productive and market domains.

► Such competencies take time to be developed and are then Such competencies take time to be developed and are then typically sticky and local. typically sticky and local.

► Established capabilities may adapt only slowly to changes in Established capabilities may adapt only slowly to changes in technology and demand and new capabilities more in tune technology and demand and new capabilities more in tune with the new demand or technology may be necessary. with the new demand or technology may be necessary.

► When products are systems with various components and When products are systems with various components and subsystems, the capabilities of coordination and integration subsystems, the capabilities of coordination and integration of these capabilities may be relevant. This may provide an of these capabilities may be relevant. This may provide an advantage to integrated firms.advantage to integrated firms.

► The growth and dynamics of competencies in each one of The growth and dynamics of competencies in each one of two vertically related industries influences the evolution of two vertically related industries influences the evolution of the other sector and shapes the dynamics of vertical the other sector and shapes the dynamics of vertical integration and specializationintegration and specialization


Competencies and selectionCompetencies and selection► The time dimension: The time dimension:

ompetencies take time to be developed and the previous history of the ompetencies take time to be developed and the previous history of the processes of construction of those capabilities often is important in processes of construction of those capabilities often is important in determining what firms can and cannot do. determining what firms can and cannot do.

► decisions to specialize and to vertically integrate are not symmetrical: decisions to specialize and to vertically integrate are not symmetrical: if a firm decides to discontinue the development and production of certain components, if a firm decides to discontinue the development and production of certain components,

it might find it difficult to resume such activities later on and in any case time and it might find it difficult to resume such activities later on and in any case time and efforts are required. Thus, these decisions are not entirely flexible as time goes by.efforts are required. Thus, these decisions are not entirely flexible as time goes by.

► distribution of capabilities: the type and competences of all the other industry distribution of capabilities: the type and competences of all the other industry participants play a major role in affecting the decision to integrate or specialize. participants play a major role in affecting the decision to integrate or specialize.

► market selection amplifies the impact of capabilities on the vertical scope of market selection amplifies the impact of capabilities on the vertical scope of firms. firms. If specialized firms have superior capabilities, selection will push for grater If specialized firms have superior capabilities, selection will push for grater

specialization and vice-versa specialization and vice-versa market selection decreases heterogeneity among firms.market selection decreases heterogeneity among firms.

► The process of capability development over time depends on the vertical scope of The process of capability development over time depends on the vertical scope of an industry:an industry: Specialized firms that compete with other specialized firms accumulate Specialized firms that compete with other specialized firms accumulate

knowledge and competence differently from vertically integrated firms. knowledge and competence differently from vertically integrated firms. In turn, the process of capability development affects the rooster of potential In turn, the process of capability development affects the rooster of potential

entrants. entrants. ..


The historyThe history

►3 ERAS3 ERAS►1. late 1940s and early 1950s: the era of 1. late 1940s and early 1950s: the era of

mainframe computers and transistors. mainframe computers and transistors. ►Early 1950s: entry of already existing Early 1950s: entry of already existing

firms: IBM, the Bunch (Burroughs, firms: IBM, the Bunch (Burroughs, Univac Rand, NCR, Control Data, Univac Rand, NCR, Control Data, Honeywell), GE and RCA. In Europe and Honeywell), GE and RCA. In Europe and Japan, Philips, and Siemens.Japan, Philips, and Siemens.

►IBM emerges as leaderIBM emerges as leaderL. Orsenigo, Pecs, july 2009

Vertical integration and Vertical integration and specialization in the transistor specialization in the transistor

eraera►At the very beginning of the industry, At the very beginning of the industry,

most computer producers were not most computer producers were not integrated. integrated.

►second half of the 1950s and the early second half of the 1950s and the early 1960s : introduction of transistors and 1960s : introduction of transistors and beginning of the semiconductor industry:beginning of the semiconductor industry: The largest firms (IBM, RCA and GE) were The largest firms (IBM, RCA and GE) were

totally or at least partially vertically totally or at least partially vertically integrated.integrated.

The smaller firms purchased components on The smaller firms purchased components on the market.the market.


Integrated CircuitsIntegrated Circuits

► 2. The invention and development of the integrated 2. The invention and development of the integrated circuits enabled further improvements in circuits enabled further improvements in mainframe computers and reduced barriers to mainframe computers and reduced barriers to entry in the mainframe industry, stimulating the entry in the mainframe industry, stimulating the entry of new competitors to IBM. entry of new competitors to IBM.

► ICs opened the possibility of designing ICs opened the possibility of designing minicomputersminicomputers

► Governmental anti-trust suit carried on for 13 Governmental anti-trust suit carried on for 13 years by the American Justice Department against years by the American Justice Department against IBM:IBM: June 1982: IBM “ unbundles” its software and June 1982: IBM “ unbundles” its software and

peripheralsperipheralsL. Orsenigo, Pecs, july 2009

Integrated Circuits (ctd)Integrated Circuits (ctd)► With the introduction of integrated circuits IBM became fully vertically With the introduction of integrated circuits IBM became fully vertically

integrated into semiconductors. integrated into semiconductors. ► As a vertically integrated company, IBM producedAs a vertically integrated company, IBM produced the new system 360. the new system 360.

By the end of the 1960s IBM enjoyed a market predominance of 70% in By the end of the 1960s IBM enjoyed a market predominance of 70% in the world’s general service computer market.the world’s general service computer market.

► Other mainframe producers also partially integrated into integrated Other mainframe producers also partially integrated into integrated circuits. circuits.

► Three basic reasons for vertical integration:Three basic reasons for vertical integration: integrated circuits embedded system elements and thus required integrated circuits embedded system elements and thus required

close co-ordination between the system and the component close co-ordination between the system and the component producer in the design and development of both components and producer in the design and development of both components and systems. systems.

semiconductor designs became more and more “strategic” and key semiconductor designs became more and more “strategic” and key for system development, and therefore their design, development for system development, and therefore their design, development and production was kept in-house for fears of leakage of strategic and production was kept in-house for fears of leakage of strategic information. information.

the rapid growth of the mainframe market and later on of the the rapid growth of the mainframe market and later on of the minicomputer market (1960s and 1970s) generated fears of minicomputer market (1960s and 1970s) generated fears of shortages of various key semiconductor components among some shortages of various key semiconductor components among some of the largest computer producers.of the largest computer producers.


MicroprocessorsMicroprocessors► Microprocessors enabled significant improvements in Microprocessors enabled significant improvements in

mainframes. mainframes. ► They made it possible to design personal computers. They made it possible to design personal computers. ► Personal computers opened up a new demand which had not Personal computers opened up a new demand which had not

been touched by mainframes: small firms and personal users.been touched by mainframes: small firms and personal users.► The great availability of low-priced high power computer The great availability of low-priced high power computer

components, led to the beginning of the microcomputer components, led to the beginning of the microcomputer industry. industry.

► Apple Computer, Radio Shack and Commodore were all non-Apple Computer, Radio Shack and Commodore were all non-vertically integrated specialized in microcomputers.vertically integrated specialized in microcomputers.

► In 1978 the whole personal computer market was practically In 1978 the whole personal computer market was practically ruled by those three firms which enjoyed together the 72% of ruled by those three firms which enjoyed together the 72% of the worldwide market. the worldwide market.

► However already by 1980, new start-ups were entering into the However already by 1980, new start-ups were entering into the market with an increase in competition and an intensification of market with an increase in competition and an intensification of selection. selection.

► In 1980 IBM decided to enter the production of microcomputer.In 1980 IBM decided to enter the production of microcomputer.


IBM, Intel and MicrosoftIBM, Intel and Microsoft► IBM strategy was to establish a common standard in the market through the IBM strategy was to establish a common standard in the market through the

production of a successful microcomputer (the PC) as the company did with production of a successful microcomputer (the PC) as the company did with the launch of the 360 system in the mainframe market. the launch of the 360 system in the mainframe market.

► IBM decided to buy its own components, peripherals and software from IBM decided to buy its own components, peripherals and software from outside suppliers instead to build them internally.outside suppliers instead to build them internally.

► IBM needed to speed up microcomputer production and did not have IBM needed to speed up microcomputer production and did not have advanced internal capabilities in this respect. Moreover, also the software advanced internal capabilities in this respect. Moreover, also the software had to be developed independently from the hardware. Only the assembly of had to be developed independently from the hardware. Only the assembly of the minicomputers parts was supposed to be undertaken at IBM the minicomputers parts was supposed to be undertaken at IBM

► IBM decided to choose Intel’s 8-bit older chip rather then the state of the art IBM decided to choose Intel’s 8-bit older chip rather then the state of the art chips of Motorola or its clones which were much more powerful (and used by chips of Motorola or its clones which were much more powerful (and used by the most of IBM competitors) the most of IBM competitors)

► IBM required Intel to sign a standard nondisclosure agreement and, in IBM required Intel to sign a standard nondisclosure agreement and, in addition, stated that Intel should licence the chip out so that the IBM addition, stated that Intel should licence the chip out so that the IBM productive plant in Florida could be sure of a second alternative source. productive plant in Florida could be sure of a second alternative source.

► IBM also turned to Microsoft for the standard operating software: MS-DOS. IBM also turned to Microsoft for the standard operating software: MS-DOS. IBM agreed to let Microsoft licence its software products to others, because IBM agreed to let Microsoft licence its software products to others, because IBM aimed to lock the emerging market to its operating software.IBM aimed to lock the emerging market to its operating software.

► In this way, however, Microsoft and Intel were able to conquer the respective In this way, however, Microsoft and Intel were able to conquer the respective software and microprocessor markets in few years.software and microprocessor markets in few years.


The PC MarketThe PC Market

► The huge unanticipated demand for The huge unanticipated demand for microcomputers quickly transformed the microcomputers quickly transformed the microcomputer industry: established and start-ups microcomputer industry: established and start-ups companies swarmed into the minicomputer market companies swarmed into the minicomputer market because it was relatively easy developing or because it was relatively easy developing or cloning the PC. cloning the PC.

► In the late 1984, as output began to catch up with In the late 1984, as output began to catch up with demand, an industry shake-out occurred. demand, an industry shake-out occurred.

► With time, IBM role of coordinator of With time, IBM role of coordinator of decentralized technical progress by various decentralized technical progress by various suppliers weakened, because a shared suppliers weakened, because a shared technological leadership emerged with Intel and technological leadership emerged with Intel and Microsoft. Microsoft.


Vertical DisintegrationVertical Disintegration

Vertically integrated computer producers-- Vertically integrated computer producers-- including IBM-- exited from large scale production including IBM-- exited from large scale production of semiconductor components. of semiconductor components.

Dis-integration took place because the new demand Dis-integration took place because the new demand for semiconductors coming from personal computer for semiconductors coming from personal computer producers had grown greatly; in response, a variety producers had grown greatly; in response, a variety of highly advanced components were introduced by of highly advanced components were introduced by several merchant microelectronics firms. several merchant microelectronics firms.

A key firm -Intel- emerged as the industry leader A key firm -Intel- emerged as the industry leader for microprocessors, thus determining a de facto for microprocessors, thus determining a de facto standard in the semiconductor industry to which standard in the semiconductor industry to which computer producers, out of necessity, complied.computer producers, out of necessity, complied.


The Model: An OverviewThe Model: An Overview► At the beginning of the simulation, a given number of firms enters the At the beginning of the simulation, a given number of firms enters the

market and begin to design and sell computers. market and begin to design and sell computers. ► Computers are defined as a mix of characteristics, i.e. cheapness and Computers are defined as a mix of characteristics, i.e. cheapness and

performance. performance. ► Computers makers are born specialised and buy components on the Computers makers are born specialised and buy components on the

marketplace from specialized component suppliers. The design of marketplace from specialized component suppliers. The design of semiconductors is based on the available component technology, i.e. semiconductors is based on the available component technology, i.e. transistors.transistors.

► Component firms sell their products to computer producers (Component firms sell their products to computer producers (as a as a function of the quality of their semiconductors) function of the quality of their semiconductors) and to an external and to an external marketmarket, which is not explicitly modeled., which is not explicitly modeled.

► Computers are sold to heterogeneous groups of consumers as a function Computers are sold to heterogeneous groups of consumers as a function of their achieved merit of design. At the beginning, component of their achieved merit of design. At the beginning, component technology makes it possible to design computers – mainframes - the technology makes it possible to design computers – mainframes - the characteristics of which appeal to consumers relatively more interested characteristics of which appeal to consumers relatively more interested in performance rather than in their price. in performance rather than in their price.

► Computer firms’ sales are also influenced by phenomena of inertia and Computer firms’ sales are also influenced by phenomena of inertia and brand-loyalty brand-loyalty By investing profits in R&D firms improve the quality of their products. By investing profits in R&D firms improve the quality of their products. Some firms grow, others lose market shares and eventually exit. Some firms grow, others lose market shares and eventually exit.


Integrated CircuitsIntegrated Circuits

► Technological discontinuities in component Technological discontinuities in component technology. technology.

► First, integrated circuits- become exogenously First, integrated circuits- become exogenously available. available.

► This new technology allows for the entry of This new technology allows for the entry of new semiconductor firms. new semiconductor firms.

► As they invest in R&D and the new technology As they invest in R&D and the new technology improves, they will gradually become more improves, they will gradually become more efficient than competitors belonging to the efficient than competitors belonging to the older generation, eventually displacing them. older generation, eventually displacing them.


MicroprocessorsMicroprocessors

► After some more time microprocessors are After some more time microprocessors are introduced and again new component firms enter introduced and again new component firms enter the market. the market.

► Microprocessors make it possible not only to design Microprocessors make it possible not only to design better mainframes but also to design a new better mainframes but also to design a new typology of computers which appeal to new groups typology of computers which appeal to new groups of customers relatively more interested in the of customers relatively more interested in the cheapness rather than in the performance of the cheapness rather than in the performance of the machines. machines.

► A new generation of computer firms enters the A new generation of computer firms enters the industry, opening up a new market – personal industry, opening up a new market – personal computers.computers.


Vertical integration Vertical integration ► The decision to produce component in-house should in principle be The decision to produce component in-house should in principle be

driven by considerations related to the relative achievable quality of driven by considerations related to the relative achievable quality of the components designed in-house as compared to those offered by the components designed in-house as compared to those offered by the specialist suppliers. the specialist suppliers.

► However, computer firms can only conjecture about the quality of However, computer firms can only conjecture about the quality of the components they might end up designing. the components they might end up designing.

► The decision to vertically integrate is led (probabilistically) by the The decision to vertically integrate is led (probabilistically) by the relative size of computer firms vis-à-vis (the largest) component relative size of computer firms vis-à-vis (the largest) component producer. producer. If computer producers are larger enough as compared to extant If computer producers are larger enough as compared to extant

suppliers, they can fund a much larger flow of R&D expenditures and suppliers, they can fund a much larger flow of R&D expenditures and achieve better quality. achieve better quality.

fears of supply shortages may induce vertical integration. Again, tfears of supply shortages may induce vertical integration. Again, this is his is likely to be the case if semiconductor firms are small.likely to be the case if semiconductor firms are small.

► The decision to vertically integrate depends probabilistically on the The decision to vertically integrate depends probabilistically on the age of the component technology: age of the component technology: Early stages: risks of getting stuck in an inferior trajectory Early stages: risks of getting stuck in an inferior trajectory Established trajectories: the probability that new, superior generations Established trajectories: the probability that new, superior generations

of components may be frequently invented by component suppliers is of components may be frequently invented by component suppliers is lower. lower.


SpecializationSpecialization

► Vertical disintegration is driven by a comparison Vertical disintegration is driven by a comparison between the merit of design of the components between the merit of design of the components produced in-house vis-à-vis those made available produced in-house vis-à-vis those made available by specialised semiconductors producers. by specialised semiconductors producers.

► This is likely to happen in the early stages of the This is likely to happen in the early stages of the development of a new component technology development of a new component technology and as semiconductor producers grow big and as semiconductor producers grow big enough to sustain a high level of R&D enough to sustain a high level of R&D expenditures. expenditures.

► After signing a contract, the computer producer After signing a contract, the computer producer is tied to the component firm for a given number is tied to the component firm for a given number of periods.of periods.


The ModelThe Model► ComputersComputers► Computers are defined as a point in the space of characteristics, Computers are defined as a point in the space of characteristics,

cheapness (i.e. the inverse of price) and performance. cheapness (i.e. the inverse of price) and performance. ► As a consequence of firms’ R&D investment, the characteristics As a consequence of firms’ R&D investment, the characteristics

of computers of a given type improve over time. of computers of a given type improve over time. ► The position of a particular computer design at any time defines The position of a particular computer design at any time defines

its “merit of design” (Mod) or quality. In turn, computers result its “merit of design” (Mod) or quality. In turn, computers result from the combination of two main inputs, systems and from the combination of two main inputs, systems and components. components.

► The level of the merit of design, Mod, is given by a CES The level of the merit of design, Mod, is given by a CES function:function:

► (1) (1) ► with A > 1, 0 < t < 1 and r > -1. The elasticity of substitution is: with A > 1, 0 < t < 1 and r > -1. The elasticity of substitution is:

= 1/ (1 + r)= 1/ (1 + r) ..► Mainframes PCs. Mainframes PCs. ► No diversificationNo diversification

1

,,, mod1mod SYSti

COMPti

COMPUTERti AMod


Demand for ComputersDemand for Computers► Customers of computers are characterized by their preferences about the Customers of computers are characterized by their preferences about the

two attributes that define a computer design - performance and cheapness. two attributes that define a computer design - performance and cheapness. ► There are two customer groups: “big firms” and “small users” There are two customer groups: “big firms” and “small users” ► Each customer group consists of a large number of heterogeneous Each customer group consists of a large number of heterogeneous

subgroups. Within a particular sub group customers buy computers valuing subgroups. Within a particular sub group customers buy computers valuing its "merit", compared to other products. In addition, however, markets are its "merit", compared to other products. In addition, however, markets are characterized by frictions of various sorts, including imperfect information characterized by frictions of various sorts, including imperfect information and sheer inertia in consumers behaviour, brand-loyalty (or lock in) effectsand sheer inertia in consumers behaviour, brand-loyalty (or lock in) effects

► (2)(2)► The propensity The propensity Li Li of computer i to be sold to a group of customers at time t of computer i to be sold to a group of customers at time t

is defined as: is defined as: ► (3)(3)► where Sit-1 is the market share; the probability where Sit-1 is the market share; the probability Pri Pri of the computer i to be of the computer i to be

sold to a group of customers at time t is given by:sold to a group of customers at time t is given by:

► (4)(4)► From this firm – if selected - the submarket buys a number of computers From this firm – if selected - the submarket buys a number of computers

equal to equal to MitMit. .

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The market for The market for componentscomponents

► Systems are designed in-house by computer firms, while components Systems are designed in-house by computer firms, while components may be also bought by specialized producers of semiconductors. may be also bought by specialized producers of semiconductors.

► three different component technologies transistors, integrated three different component technologies transistors, integrated circuits and then microprocessorscircuits and then microprocessors

► At the beginning of the simulation and at the time of each At the beginning of the simulation and at the time of each technological discontinuity a new cohort of firms (12 in this version technological discontinuity a new cohort of firms (12 in this version of the model) enters the market, producing components with the of the model) enters the market, producing components with the latest available technology.latest available technology.

► The demand for components, faced by component specialized firms, The demand for components, faced by component specialized firms, comes from two sources:comes from two sources:

External demand, not modeled explicitlyExternal demand, not modeled explicitly demand for components from computer firms which have decided to demand for components from computer firms which have decided to

outsource component production (specialized firms). outsource component production (specialized firms). ► When a computer firm decides to outsource components production, When a computer firm decides to outsource components production,

it starts to scan the market for potential suppliers. Suppliers are it starts to scan the market for potential suppliers. Suppliers are chosen by computer firms on the basis of a ranking of the merit of chosen by computer firms on the basis of a ranking of the merit of design of the components produced by each supplier. Given design of the components produced by each supplier. Given uncertainty and imperfect information, this choice is partly uncertainty and imperfect information, this choice is partly stochastic.stochastic.


Market for componentsMarket for components► Specifically, a specialized computer producer will “sign” a contract with Specifically, a specialized computer producer will “sign” a contract with

a component producer selected by using a probability function that a component producer selected by using a probability function that considers the technical quality of the components: the higher the quality considers the technical quality of the components: the higher the quality of the component , the higher the probability of signing a contract with of the component , the higher the probability of signing a contract with a computer producer.a computer producer.

►

(5)(5)

► where LitCOMP is the propensity of component producer i to be where LitCOMP is the propensity of component producer i to be selected and selected and Pri,t Pri,t is the probability of a supplier to be selected. is the probability of a supplier to be selected.

► A component firm which signs a contract sells a number of components A component firm which signs a contract sells a number of components which is related to the proportion to which components and systems which is related to the proportion to which components and systems combine in order to build a computer (in the current parametrization, combine in order to build a computer (in the current parametrization, the proportion is one to one). After signing the contract the computer the proportion is one to one). After signing the contract the computer firm is tied to the component supplier for a certain number of periods. firm is tied to the component supplier for a certain number of periods. When this period expires, a new supplier might be selected, using the When this period expires, a new supplier might be selected, using the same procedure, if the firm still decides to buy component on the open same procedure, if the firm still decides to buy component on the open market.market.

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Firms’ behaviour and technical Firms’ behaviour and technical progressprogress

► Firms start with a given (randomly drawn) mod and they start to Firms start with a given (randomly drawn) mod and they start to sell make profits and invest in R&D spending. sell make profits and invest in R&D spending.

► Price is obtained by adding a mark-up, m , to costs which in turn Price is obtained by adding a mark-up, m , to costs which in turn are derived from the merit of design achieved by a computer. are derived from the merit of design achieved by a computer. The price of components charged by component suppliers is The price of components charged by component suppliers is determined symmetrically by adding a fixed mark-up to unit determined symmetrically by adding a fixed mark-up to unit production costs.production costs.

► R&D expenditures are calculated as . a constant fraction of profits R&D expenditures are calculated as . a constant fraction of profits ► Technical progress: double draw scheme”. In each period firms Technical progress: double draw scheme”. In each period firms

draw the value of their Mod from a normal distribution. The draw the value of their Mod from a normal distribution. The number of draws that any one firm can take is set proportional to number of draws that any one firm can take is set proportional to its R&D spending its R&D spending

► In each period, the values of the Mod obtained through the firms’ In each period, the values of the Mod obtained through the firms’ draws are compared with the current Mod, and the higher among draws are compared with the current Mod, and the higher among these values is kept. Thus, more draws increase the likelihood to these values is kept. Thus, more draws increase the likelihood to get a higher Mod for both systems and components. get a higher Mod for both systems and components.


Public knowledgePublic knowledge► The extent to which technical progress is possible for each firm, given their R&D The extent to which technical progress is possible for each firm, given their R&D

investment depends in turn on two variables: the level of publicly available investment depends in turn on two variables: the level of publicly available knowledge and the value of the Mod achieved by the firm in the previous periodknowledge and the value of the Mod achieved by the firm in the previous period

► Public knowledge is specific to each basic component technology and it grows Public knowledge is specific to each basic component technology and it grows exogenously over time. When a new technology is introduced, its corresponding exogenously over time. When a new technology is introduced, its corresponding level of public knowledge is lower than that reached by current technology, but level of public knowledge is lower than that reached by current technology, but then it grows faster and at a certain time it overtakes the public knowledge of the then it grows faster and at a certain time it overtakes the public knowledge of the older technology. The rate of growth of public knowledge starts to slow down as older technology. The rate of growth of public knowledge starts to slow down as time goes by. time goes by. An integrated computer firm decides to adopt the new technology An integrated computer firm decides to adopt the new technology when the mean of its own distribution becomes inferior to the level of the public when the mean of its own distribution becomes inferior to the level of the public knowledge of the new technology.knowledge of the new technology.

► The mean of the normal distribution from which the values of the merit of design The mean of the normal distribution from which the values of the merit of design (Mod) of system or component are taken, is a linear combination of the Mod at (Mod) of system or component are taken, is a linear combination of the Mod at time t-1 of firm i and of the level of publicly available knowledge, PK, at time t: time t-1 of firm i and of the level of publicly available knowledge, PK, at time t:

►

► And And

► t>tmcK, t>tmcK, limlim and and nunu are parameters and are parameters and tmcktmck is the date of introduction of the new is the date of introduction of the new component technology.component technology.

Kttiti PKhModh )1(1,,

K

tgK

Kt

tmctnuePK K

11lim


R&DR&D► Integrated producers enjoy some coordination advantages Integrated producers enjoy some coordination advantages

as compared to specialized producers As a consequence, the as compared to specialized producers As a consequence, the productivity of their R&D efforts on components is productivity of their R&D efforts on components is enhanced by a spillover effectenhanced by a spillover effect

► cCOMP*mcCOMP*m is the difference between the price of component is the difference between the price of component in the open market and its actual cost for the producer; it in the open market and its actual cost for the producer; it represents savings gained by self-production. An integrated represents savings gained by self-production. An integrated computer firm allocate these resources to component R&D.computer firm allocate these resources to component R&D.

► Specialized computer producers invest all their R&D on Specialized computer producers invest all their R&D on systems and obviously do not enjoy the coordination systems and obviously do not enjoy the coordination advantages.advantages.

► Component suppliers spend all their R&D on the Component suppliers spend all their R&D on the development of components.development of components.

tiCOMPti

COMPti DRspillovercDR ,,, &&


Vertical Integration Vertical Integration

Probability of integration:Probability of integration:Let:Let:

►

► where: where: ► AgeOfTechK ( K =TR,IC,MP) = t – (Starting time of AgeOfTechK ( K =TR,IC,MP) = t – (Starting time of

Technology K); Qit is the sales of the computer producer; Technology K); Qit is the sales of the computer producer; biggestQt COMP is the sales of the largest component biggestQt COMP is the sales of the largest component producers and w is a parameter producers and w is a parameter

Then:Then:►

► where B is a parameter. If the probability of integration is where B is a parameter. If the probability of integration is bigger than a number drawn from a uniform distribution (0-bigger than a number drawn from a uniform distribution (0-1), integration occurs.1), integration occurs.

2,1, )(1;min b

COMPt

tibK

tibiggestQ

Q

w

AgeOfTechZ

ti

ti

ti Z

ZBIntegrateob

,

,

, 1)(Pr


SpecializationSpecialization► The probability of specialization for each firm is:The probability of specialization for each firm is:

► where maxModCOMP is the higher component Mod where maxModCOMP is the higher component Mod available on the market. available on the market.

► Then:Then:►

► A is a parameter and if A is a parameter and if Prob(Specialize)Prob(Specialize) is bigger than a is bigger than a number randomly drawn by a uniform distribution, number randomly drawn by a uniform distribution, specialization will occur.specialization will occur.

► A specialized computer firm may also decide to change A specialized computer firm may also decide to change its supplier, if a better producer has emerged in the its supplier, if a better producer has emerged in the market. The procedure for changing supplier follows the market. The procedure for changing supplier follows the same rule for the specialization process. same rule for the specialization process.

0,

mod

modmaxmax

,

,

, COMPti

COMPti

COMPt

ti

ModX

ti

ti

ti X

XASpecializeob

,

,

, 1)(Pr


ExitExit

► Computer firms: the variableComputer firms: the variable► Eit = (1-e)*lshr + e*shareitEit = (1-e)*lshr + e*shareit► is computed, where lshr is the inverse of the number of is computed, where lshr is the inverse of the number of

firms active in the market at the beginning of the firms active in the market at the beginning of the simulation (i.e. the market share that would have been simulation (i.e. the market share that would have been held by n equal firms), shareit is the market share of held by n equal firms), shareit is the market share of firm i at time t and 0<e<1 is a parameter. Then, if Eit firm i at time t and 0<e<1 is a parameter. Then, if Eit < E, where E is a constant threshold, the firm exits. < E, where E is a constant threshold, the firm exits.

► The rule governing the exit of the semiconductor The rule governing the exit of the semiconductor producers is different and simpler. The probability of producers is different and simpler. The probability of exiting of any one firm is an increasing function of the exiting of any one firm is an increasing function of the number of consecutive periods in which it doesn’t sell number of consecutive periods in which it doesn’t sell to a computer producer.to a computer producer.


Standard simulationStandard simulation

► Assumptions:Assumptions:► the size of the external market is relatively the size of the external market is relatively

small in the case of transistors and small in the case of transistors and integrated circuits and significantly higher integrated circuits and significantly higher for microprocessors;for microprocessors;

► lock-in effects in demand are very important lock-in effects in demand are very important for mainframes and much less so for both for mainframes and much less so for both PCs and componentsPCs and components

► the introduction of microprocessors allows the introduction of microprocessors allows much higher improvements in component much higher improvements in component designs as compared to the older designs as compared to the older technology: this technological discontinuity is technology: this technological discontinuity is much sharper than the previous one.much sharper than the previous one.


The Standard Simulation: The Standard Simulation: ResultsResults

► A dominant firm emerges quickly in the mainframe industry and A dominant firm emerges quickly in the mainframe industry and becomes vertically integrated.becomes vertically integrated.

► In the semiconductor industry, concentration first rises as demand In the semiconductor industry, concentration first rises as demand from computer producers exert strong selective pressures and from computer producers exert strong selective pressures and firms leave the market. The decrease of the number of mainframe firms leave the market. The decrease of the number of mainframe producers gradually softens competition and the Herfindahl index producers gradually softens competition and the Herfindahl index declines in the component market. Concentration begins to grow declines in the component market. Concentration begins to grow again as a vertically integrated monopolist comes to dominate the again as a vertically integrated monopolist comes to dominate the computer market: component suppliers are left with no demand computer market: component suppliers are left with no demand from the mainframe firms and exit continues. from the mainframe firms and exit continues.

► At the time of the introduction of integrated circuits, new At the time of the introduction of integrated circuits, new semiconductor companies enter the market and concentration semiconductor companies enter the market and concentration drops sharply. drops sharply.

► The dominant mainframe firm remains vertically integrated, The dominant mainframe firm remains vertically integrated, because the external market is not large enough to sustain a because the external market is not large enough to sustain a significant growth of the new entrants and of the quality of their significant growth of the new entrants and of the quality of their components. The absence of a demand from the mainframe components. The absence of a demand from the mainframe producer induces a shakeout and concentration gradually producer induces a shakeout and concentration gradually increases in the semiconductor marketincreases in the semiconductor market


The age of microprocessorsThe age of microprocessors► Microprocessors constitute a major technological advance as Microprocessors constitute a major technological advance as

compared to integrated circuit and a large external market compared to integrated circuit and a large external market supports a significant improvement in the quality of the new supports a significant improvement in the quality of the new components. components.

► the PC market opens up, generating a substantial new demand the PC market opens up, generating a substantial new demand and fuelling further advances in the merit of the components. and fuelling further advances in the merit of the components.

► The computer leader decides to specializeThe computer leader decides to specialize► Competition in components: large external marketCompetition in components: large external market► The establishment of a monopoly in the supply of components The establishment of a monopoly in the supply of components

contributes however to maintaining competition in the PC contributes however to maintaining competition in the PC market, since all firms get their microprocessors from the market, since all firms get their microprocessors from the same source. same source.

► In the last periods of the simulation, as the microprocessors In the last periods of the simulation, as the microprocessors technology matures, the incentives towards specialization technology matures, the incentives towards specialization become slightly less compelling and, in some simulations, the become slightly less compelling and, in some simulations, the mainframe firm and some PC producers decide to vertically mainframe firm and some PC producers decide to vertically integrateintegrate


History-Friendly Simulation: History-Friendly Simulation: ResultsResults


Effects of public policies in a Effects of public policies in a dynamic setting:dynamic setting: key key

variablesvariables►a) the strength of increasing returnsa) the strength of increasing returns►b) the timing of the arrival of the b) the timing of the arrival of the

technological discontinuities and their technological discontinuities and their magnitudemagnitude

►c) the degree of heterogeneity of agents, c) the degree of heterogeneity of agents, in particular as it concerns consumers;in particular as it concerns consumers;

►d) the interactions between the d) the interactions between the upstream and downstream industries.upstream and downstream industries.

►Policy ineffectivenessPolicy ineffectiveness►Indirect and unintended effectsIndirect and unintended effects


Supply side policiesSupply side policies

►FFostering the diffusion of knowledgeostering the diffusion of knowledge►support for public basic researchsupport for public basic research►AntitrustAntitrust►support the entry of new actorssupport the entry of new actors


Demand side policiesDemand side policies

► support open standards so that lock –support open standards so that lock –ins are avoided;ins are avoided;

►use public procurement in a selective use public procurement in a selective way, so that the most advanced way, so that the most advanced technologies are supported; technologies are supported;

►use public procurement as an use public procurement as an additional market, in order to provide additional market, in order to provide larger markets and opportunities for larger markets and opportunities for firms’ growth and innovation. firms’ growth and innovation.


““policy ineffectiveness” policy ineffectiveness”

►cumulative nature of the market. Small cumulative nature of the market. Small initial advantages tend to grow bigger over initial advantages tend to grow bigger over time and catching up is almost impossible. time and catching up is almost impossible.

►Leaders do not only have a “static” Leaders do not only have a “static” advantage: they run faster than laggards. advantage: they run faster than laggards.

►From “leveling the playing field” to From “leveling the playing field” to “positive discrimination”? policies should “positive discrimination”? policies should make competitors able to run faster than make competitors able to run faster than the monopolist, and not just remove static the monopolist, and not just remove static disadvantages.disadvantages.


Investment in basic researchInvestment in basic research

► Increase in the rate of growth of Increase in the rate of growth of public knowledgepublic knowledge

►Faster integration in transistors and Faster integration in transistors and integrated circuits; increase in integrated circuits; increase in integration in the microprocessors era: integration in the microprocessors era: better computers induce higher better computers induce higher demand and faster firms’ growthdemand and faster firms’ growth

►Great increase in the rate of technical Great increase in the rate of technical changechange


Favouring circulation Favouring circulation knowledgeknowledge

►Firms can draw from existing Firms can draw from existing techniquestechniques

►Little effect on concentration in Little effect on concentration in mainframes (high bandwagon)mainframes (high bandwagon)

► Concentration decreases in PCs and Concentration decreases in PCs and components components

►Increase in the rate of technical Increase in the rate of technical changechange


AntitrustAntitrust

► Antitrust intervenes when a firm has a market share Antitrust intervenes when a firm has a market share > 90% and breaks the monopolist in two companies.> 90% and breaks the monopolist in two companies.

► No effect: given strong lock-in effects, a new No effect: given strong lock-in effects, a new monopolist emerges very quicklymonopolist emerges very quickly

► Antitrust intervenes also by reducing lock-in effectsAntitrust intervenes also by reducing lock-in effects► Effects: Effects:

competition in mainframes competition in mainframes Slower vertical integrationSlower vertical integration Concentration grows in components market in the age of Concentration grows in components market in the age of

transistors and integrated circuitstransistors and integrated circuits Competition and specialization in all markets in the Competition and specialization in all markets in the

microprocessor eramicroprocessor era No effects on the rate of technical changeNo effects on the rate of technical change


►timing of antitrust policy: “Early” timing of antitrust policy: “Early” intervention has almost no effect intervention has almost no effect because a new monopolist emerges because a new monopolist emerges very soon. “Late” intervention very soon. “Late” intervention generates a duopoly, because generates a duopoly, because increasing returns on the supply side increasing returns on the supply side were fading away by that time.were fading away by that time.

►small and transitory effects. small and transitory effects.


►cumulative nature of the market. Small cumulative nature of the market. Small initial advantages tend to grow bigger over initial advantages tend to grow bigger over time and catching up is almost impossible. time and catching up is almost impossible.

►Leaders do not only have a “static” Leaders do not only have a “static” advantage: they run faster than laggards. advantage: they run faster than laggards.

►From “leveling the playing field” to From “leveling the playing field” to “positive discrimination”? policies should “positive discrimination”? policies should make competitors able to run faster than make competitors able to run faster than the monopolist, and not just remove static the monopolist, and not just remove static disadvantages.disadvantages.


Support to entry of new Support to entry of new firmsfirms

► doubling the number of firms doubling the number of firms entering after each discontinuity in entering after each discontinuity in the computer and in the component the computer and in the component market: No effectmarket: No effect

►twelve new firms enter each market twelve new firms enter each market every forty period. In this latter case, every forty period. In this latter case, new firms enter having the average new firms enter having the average merit of design present in the merit of design present in the industry. industry.


periodic entry periodic entry

► no changes in mainframes. no changes in mainframes. ► In microprocessors, periodic entry does not In microprocessors, periodic entry does not

change the leadership of the largest firm, but change the leadership of the largest firm, but reduces industry concentration by greatly reduces industry concentration by greatly increasing the number of firms that are active and increasing the number of firms that are active and survive in the industry. survive in the industry.

► bandwagon effects are weaker than in the bandwagon effects are weaker than in the mainframes market; new entrants in the mainframes market; new entrants in the component markets compete with a leader which component markets compete with a leader which is still building its dominant position and they are is still building its dominant position and they are therefore able to survive. The later cohorts of therefore able to survive. The later cohorts of entrants, though, find it increasingly difficult to entrants, though, find it increasingly difficult to compete. compete. L. Orsenigo, Pecs, july 2009

TimingTiming

► Why can the entry of new firms – as contrasted Why can the entry of new firms – as contrasted with an increase in the initial number of firms with an increase in the initial number of firms - limit the tendencies towards monopoly even - limit the tendencies towards monopoly even in the long run? If increasing returns are in the long run? If increasing returns are sufficiently weak to allow for a gradual process sufficiently weak to allow for a gradual process of concentration, the early new cohorts of firms of concentration, the early new cohorts of firms enter with a level of the Mod which is higher enter with a level of the Mod which is higher than that attained by initial laggards and than that attained by initial laggards and sufficiently high as compared to what has been sufficiently high as compared to what has been achieved by the emerging leader, to provide achieved by the emerging leader, to provide them with a chance of surviving. them with a chance of surviving.


►Moreover the market size for Moreover the market size for microprocessors is rather large, microprocessors is rather large, because it is composed by the demand because it is composed by the demand coming from the specialized coming from the specialized mainframe producers and PC mainframe producers and PC producers, and by the external producers, and by the external market, so that the survival and market, so that the survival and growth of successful new firms is growth of successful new firms is possible. possible.


Support for entry of new Support for entry of new firms in microprocessorsfirms in microprocessors

►Herfindahl indexHerfindahl index


Support for entry of new firms in Support for entry of new firms in microprocessors MP: average Mod (avMod) microprocessors MP: average Mod (avMod)

and best mod (BEST MODand best mod (BEST MOD) )


Reduction of lock-ins and Reduction of lock-ins and support for open standardssupport for open standards

► Reduce bandwagonReduce bandwagon►The effects on concentration are The effects on concentration are

significant. The Herfindhal index in both significant. The Herfindhal index in both the mainframe and microprocessor markets the mainframe and microprocessor markets drops significantly. As a consequence of the drops significantly. As a consequence of the reduction in concentration in reduction in concentration in microprocessors, also concentration in microprocessors, also concentration in personal computer is lower, because no personal computer is lower, because no microprocessor leader is present boosting microprocessor leader is present boosting the growth of some PC firms the growth of some PC firms


Support for open standards: Support for open standards: Herfindahl indexHerfindahl index


Support for open standards: Support for open standards: integration ratiointegration ratio


Selective public Selective public procurementprocurement

► In the age of transistors and integrated In the age of transistors and integrated circuits the best component firm gets circuits the best component firm gets additional sales from the external marketadditional sales from the external market

►Concentration increases in component Concentration increases in component marketmarket

►Slower integrationSlower integration►When public procurement stops the When public procurement stops the

leading mainframe producer regains a leading mainframe producer regains a major size advantage : vertical integration major size advantage : vertical integration takes place again - public procurement takes place again - public procurement has to be permanenthas to be permanent


Selective public procurement: Selective public procurement: simulationsimulation

► transistors and transistors and integrated circuits: integrated circuits: Herfindahl indexHerfindahl index

► transistors and transistors and integrated circuits: integrated circuits: best mod best mod


Permanent public Permanent public procurementprocurement

►In the transistor period, the mainframe In the transistor period, the mainframe industry is not highly concentrated yet and industry is not highly concentrated yet and not strongly vertically integrated: more not strongly vertically integrated: more transistor firms survivetransistor firms survive

►In the integrated circuit period, In the integrated circuit period, concentration in mainframes is already concentration in mainframes is already very high. The effect of public very high. The effect of public procurement is to reinforce the existing procurement is to reinforce the existing leadership in components. leadership in components.

►Lower vertical integrationLower vertical integrationL. Orsenigo, Pecs, july 2009

Unintended consequencesUnintended consequences



The creation of open standards in computers leads to the The creation of open standards in computers leads to the

emergence of concentration in componentsemergence of concentration in components ► open standards and elimination of the bandwagon open standards and elimination of the bandwagon

effects reduces concentration in all industries. effects reduces concentration in all industries. ► lower concentration in mainframes entails a lower concentration in mainframes entails a

reduction in vertical integration and an increase in reduction in vertical integration and an increase in the demand for microprocessors from the previously the demand for microprocessors from the previously integrated large mainframe producers. integrated large mainframe producers.

► a de-facto standard concerning the interfaces a de-facto standard concerning the interfaces between components arises, showing itself in the between components arises, showing itself in the form of the emergence of a bandwagon in component form of the emergence of a bandwagon in component demand. demand.

► This market-driven increase in bandwagon in This market-driven increase in bandwagon in microprocessors created by the additional demand microprocessors created by the additional demand from large specialized computer producers generates from large specialized computer producers generates concentration in the microprocessor markets. concentration in the microprocessor markets.

► unintended consequence of policy.unintended consequence of policy.


The creation of open standards in computers The creation of open standards in computers leads to the emergence of concentration in leads to the emergence of concentration in

componentscomponents

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248

MF

PC

CMP

Figure 1 – Unintended consequences: open standards and concentration. Herfindahl index

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248

MF

PC


Antitrust policy in computers leads to the emergence of a Antitrust policy in computers leads to the emergence of a monopolist in a related system market and the monopolist in a related system market and the

disappearance of a the merchant component industrydisappearance of a the merchant component industry

► an antitrust policy breaks the mainframe monopolist in twoan antitrust policy breaks the mainframe monopolist in two► one of the two producers diversifies into personal computers, one of the two producers diversifies into personal computers, ► a new large producer enters this industry with a relevant a new large producer enters this industry with a relevant

brand name. brand name. ► Because of its size, reputation and marketing capabilities, Because of its size, reputation and marketing capabilities,

this producer is able to increase the level of the bandwagon this producer is able to increase the level of the bandwagon effect in the personal computer industry and become the effect in the personal computer industry and become the leader in this industry. This is a first unintended leader in this industry. This is a first unintended consequence of public policy. consequence of public policy.

► In addition, the new personal computer monopolist may In addition, the new personal computer monopolist may become vertically integrated into microprocessors. become vertically integrated into microprocessors.

► This may lead to the disappearance of the microprocessor This may lead to the disappearance of the microprocessor industry, if there are no other external markets for industry, if there are no other external markets for semiconductors. This is the second unintended consequence semiconductors. This is the second unintended consequence of the policyof the policy


Antitrust policy in computers leads to the emergence of a Antitrust policy in computers leads to the emergence of a monopolist in a related system market and the monopolist in a related system market and the

disappearance of a the merchant component industrydisappearance of a the merchant component industry

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248

MF

PC

CMP

Figure 1 – Unintended consequences: antitrust, diversification and disappearance of the component industry:

Herfindahl index

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248

MF

PC

Figure 2 – Unintended consequences: antitrust, diversification and disappearance of the component industry.

Integration ratio

Open standards in systems lead to Open standards in systems lead to the emergence of a merchant the emergence of a merchant

component industry component industry ► highly concentrated computer and PC highly concentrated computer and PC

industries (high bandwagon) with large industries (high bandwagon) with large vertically integrated firmsvertically integrated firms

► no external market for components: no no external market for components: no component.component.

► policy of open standards in mainframes and policy of open standards in mainframes and PCs decreases the bandwagon effect and PCs decreases the bandwagon effect and increases competition. increases competition.

► switch to specialization emergence of an switch to specialization emergence of an independent merchant component industryindependent merchant component industry


ConclusionConclusion

► policy in dynamics, interdependent policy in dynamics, interdependent markets, characterized by heterogeneous markets, characterized by heterogeneous agents, cumulative technical advance at the agents, cumulative technical advance at the firm level, major technological and demand firm level, major technological and demand discontinuities and demand with lock-ins discontinuities and demand with lock-ins and network effectsand network effects

► PPotential policy ineffectivenessotential policy ineffectiveness► Side effectsSide effects► Unintended consequencesUnintended consequences► Pharmaceuticals and patent protectionPharmaceuticals and patent protection


franco malerba, richard nelson, luigi orsenigo and sidney winter

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