Innovation and competition in complex environments

The paper aims to shed light on the relation between technological research, competition and market dynamics, focussing on the role of product modularity. This relation is analysed via qualitative simulation modelling using a simple agent-based model. We define an economic system in which firms compete on the quality characteristics of a certain complex good, in a market where consumers have shown preferences for them. Firms are conceived as bounded rational agents that explore complex product technologies in order to improve their fitness in relation to the selection environment (i.e. the consumers’ evaluation of the characteristics of the final good). The architecture of the good produced in the system is characterised by different degrees of modularity (i.e. the lower the correlations between the contributions of the different product components to the final product fitness, the simpler the good’s technology and the higher the degree of modularity). On the other hand, the impact of product modularity on industrial dynamics is analysed using a set of quite homogeneous firms. First, the model yields highly differentiated dynamics for firms that start from similar initial conditions, pointing to the importance of their research strategies. Second, the dynamic patterns obtained show that firms may easily end up in technological lock-in in spite of initial good performance, suggesting that path-dependence could be broken. Third, modularity impinges directly upon market results: a decrease in modularity, by increasing the difficulty in searching the complex technology, selects a limited number of firms, thus determining concentration in market shares. Finally, the industrial dynamics are influenced by the evolution of the quality of the final good.