Computational Economics

, Volume 24, Issue 4, pp 321–355 | Cite as

Evaluating Market Attractiveness: Individual Incentives Versus Industry Profitability



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.


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


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Armstrong, J.S. and Brodie, R.J. (1994). Effects of portfolio planning methods on decision making: experimental results. International Journal of Research in Marketing, 11, 73–84.CrossRefGoogle Scholar
  2. Bayus, B.L. (1997). Speed-to-market and new product performance trade-offs. Journal of Production and Innovation Management, 14, 485–497.CrossRefGoogle Scholar
  3. Beardsley, G. and Mansfield, E. (1978). A note on the accuracy of industrial forecasts of the profitability of new products and processes. Journal of Business, 51, 127–135.CrossRefGoogle Scholar
  4. Boston Consulting Group (1970). The Product Portfolio, Boston, MA.Google Scholar
  5. Bottazzi, G., Dosi, G., Lippi, M., Pammolli, F. and Riccaboni, M. (2001). Innovation and corporate growth in the evolution of the drug industry. International Journal of Industrial Organization, 19, 1161–1187.CrossRefGoogle Scholar
  6. Cantner, U. and Pyka, A. (1998). Absorbing technological spillovers: simulations in an evolutionary framework. Industrial and Corporate Change, 7, 369–397.Google Scholar
  7. Christensen, C. (1997). The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press, Boston, MA.Google Scholar
  8. Cyert, R.M. and March, J.G. (1963). A Behavioral Theory of the Firm. Prentice Hall, Englewood Cliffs.Google Scholar
  9. Dawid, H. (2005). Agent-Based Models of Innovation and Technological Change. Forthcoming in: L. Tesfatsion, K. Judd (eds), Handbook of Computational Economics II: Agent-Based Computational Economics. North-Holland.Google Scholar
  10. Dawid, H. and Reimann, M. (2003). Diversification: A Road to Inefficiency in Product Innovations?. Working Paper, University of Bielefeld.Google Scholar
  11. Dawid, H., Reimann, M. and Bullnheimer, B. (2001). To innovate or not to innovate? IEEE Transactions on Evolutionary Computation, 5, 471–481.CrossRefGoogle Scholar
  12. Dosi, G. (1988). Sources, procedures and microeconomic effects of diversification. Journal of Economic Literature, 26, 1120–1171.Google Scholar
  13. Fagerberg, J. (2003). Schumpeter and the revival of evolutionary economics: an appraisal of the literature. Journal of Evolutionary Economics, 13, 125–159.CrossRefGoogle Scholar
  14. Fagiolo, G. and Dosi, G. (2003). Exploitation, exploration and innovation in a model of endogenous growth with locally interacting agents. Structural Change and Economic Dynamics, 14, 237–273.CrossRefGoogle Scholar
  15. Hax, A. and Maljuf, N.S. (1983). The use of the industry attractiveness-business strength matrix in strategic planning. Interfaces, 13, 54–71.Google Scholar
  16. Jacobson, R. and Aaker, D. (1985). Is market share all that it’s cracked up to be? Journal of Marketing, 49, 11–21.Google Scholar
  17. Jovanovic, B. and MacDonald, G.M. (1994). The life cycle of a competitive industry. Journal of Political Economy, 102, 322–347.CrossRefGoogle Scholar
  18. Klepper, S. (1996). Entry, exit, growth, and innovation over the product life cycle. American Economic Review, 86, 562–583.Google Scholar
  19. Klepper, S. (1997). Industry life cycles. Industrial and Corporate Change, 6, 145–181.Google Scholar
  20. Kotler, P. (1997). Marketing Management, 9th edn. Prentice Hall.Google Scholar
  21. Malerba, F. (1992). Learning by firms and incremental technical change. Economic Journal, 102, 845–859.Google Scholar
  22. Malerba, F., Nelson, R., Orsenigo, L. and Winter, S. (1999). “History-friendly” models of industry evolution: The computer industry. Industrial and Corporate Change, 8, 3–40.CrossRefGoogle Scholar
  23. Morrison, A. and Wensley, R. (1991). Boxing up or boxed in? A short history of the Boston Consulting Group share/growth matrix. Journal of Marketing Management, 7, 105–129.Google Scholar
  24. Nelson, R. and Winter, S.G. (1982). An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA.Google Scholar
  25. Pajares, J., Lopez, A. and Hernandez, C. (2003). Industry as an organization of agents: Innovations and R&D management. Journal of Artificial Societies and Social Simulation, 6, < > .
  26. Silverberg, G. and Verspagen, B. (1994). Collective learning, innovation and growth in a boundedly rational, evolutionary world. Journal of Evolutionary Economics, 4, 207–226.CrossRefGoogle Scholar
  27. Simon, H. (1978). Rationality as process and as product of thought. American Economic Review, 68, 1–16.Google Scholar
  28. Simon, H. (1983), Reasons in Human Affairs. Stanford University Press, Stanford.Google Scholar
  29. Wind, Y. and Mahajan, V. (1981). Designing product and business portfolios. Harvard Business Review, 59, 155–165.Google Scholar
  30. Wind, Y., Mahajan, V. and Swire, D.J. (1983). An empirical comparison of standardized portfolio methods. Journal of Marketing, 47, 89–99.Google Scholar
  31. Winter, S. (1984). Schumpeterian competition in alternative technological regimes. Journal of Economic Behavior and Organization, 5, 287–320.CrossRefGoogle Scholar
  32. Yildizoglu, M. (2002). Competing R&D strategies in an evolutionary industry model. Computational Economics, 19, 51–65.CrossRefGoogle Scholar

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Department of Business Administration and EconomicsUniversity of BielefeldBielefeldGermany
  2. 2.Institute for Operations ResearchSwiss Federal Institute of TechnologyZurichGermany

Personalised recommendations