Analysis of the simulation results allows us to draw some
preliminary conclusions and policy implications, at the level of the
firm, the industry in which they operate, and the overall market. First,
we show that, due to limited modularity, firms that start from very
similar technological conditions end up in very different positions in
the market. Different initial perceptions of the product technologies,
and limited information on the way in which the different technologies
are integrated with final product fitness, induce a number of research
strategies, quite heterogeneous across firms in an industry. This
provides an explanation of the evolutionary process induced by the
interplay of variety generation and selection as a result of product
innovations in complex technologies, rather than random changes in the
efficiency of production processes.
Second, we show that the trade off between modular and integral
technological search is extremely relevant in conditions of low
modularity. On the one side, focusing on innovations in a single module
over a long period, increases short-term competitiveness, but may lead
to technological lock-in. On the other side, focusing on understanding a
complex architecture may require too long a time, in a highly
competitive market, but may lead to the highest quality level. This
suggests that an architectural innovation is not always preferable to a
modular one: it depends on the level of modularity.
[FIGURE 8 OMITTED]
Therefore, in the presence of low modularity, some kind of
incentive would allow firms with long term strategies to stay in the
market, and benefit consumers. In other words, market mechanisms could
easily fail to provide an optimal outcome from the consumer's point
of view. Nonetheless, we have shown that full modularity is not
required, if the objective is to promote a competitive market in which
most firms can find their way to an optimal innovation strategy.
[FIGURE 9 OMITTED]
Third, our analysis suggests that the opportunity for firms to act
on the architecture of the product, and thus increase modularity to an
intermediate level, is sufficient to easily decompose innovation and
production into modules. Therefore, architectural search, combined with
product innovation, is a reasonable strategy for given levels of low
modularity. However, it should be noted that, based on our results,
intermediate modularity means that firms' innovation outcomes are
highly dependent on random changes in the innovation process.
Eventually, the need to control an integral architecture, versus the
need to reduce complexity into sub-problems, directs attention to the
firm's vertical strategy. Future work is required to understand how
changes in product modularity affect firms' organisational strategy
and also the market structure.
In terms of the market, we show that product modularity plays a
role in determining market concentration as an outcome of the
firms' capabilities to compete. From an industrial policy
perspective, this should be taken into account when evaluating
oligopolistic situations. Indeed, 'quasi-natural' monopolies
may arise, not because of high fixed production costs, but rather
because of the low level of modularity, which requires huge innovative
efforts along a wide range of technological dimensions. This is relevant
in markets where the quality of the good/service is an important policy
issue (e.g. transport equipment, health services, products with major
environmental impact).
Finally, one should take into account that a high level of market
concentration can also occur because firms that under-invest in the
architecture during the initial stages of the competitive process,
provide the market with an output which is sufficiently good with
respect to some of its components. As our analysis shows, ruling out
firms that invest in the architecture in the initial stages, may induce
technological lock-in for the whole market, which should be considered
when designing innovation policies not exclusively aimed at fostering
firm growth.
Acknowledgements
Previous versions of this paper were presented to several workshops
of the PRIN Project 'Dynamic Capabilities between Firm Organisation
and Local Systems of Production', and to the DRUID Summer
Conference 'Knowledge Innovation and Competitiveness: Dynamics of
Firms, Networks, Regions and Institutions', Copenhagen, June 18-20
2006. The authors are indebted to all the participants, and in
particular to Stefano Brusoni, Bo Carlsson, Giovanni Filatrella,
Thorbjorn Knudsen, Mauro Lombardi and Alessandro Lomi for useful
comments and suggestions. Two anonymous referees have allowed to improve
the paper substantially. Usual disclaimer applies.
Received 24 October 2006 Accepted 3 October 2007
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TOMMASO CIARLI
CIBI
Manchester Metropolitan University, UK and Department of Economics
Systems and Institutions
University of L'Aquila, Italy
RICCARDO LEONCINI
Department of Economics
University of Bologna, Italy
SANDRO MONTRESOR
Department of Economics
University of Bologna, Italy
MARCO VALENTE
Department of Economics
Systems and Institutions
University of L'Aquila, Italy
Endnotes
(1) See, for example, Ciarli et al. (2008) for a first extension.
(2) Price may thus be conceived as a further characteristic of the
good with negative impact on utility.
(3) In a different paper, we analyse the relation between
technological modularity and industrial organisation (Ciarli et al.
2008).
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