Transcript INDUSTRIAL POLICIES AND CHANGING BOUNDARIES OF …

INDUSTRIAL POLICIES IN A HISTORYFRIENDLY MODEL OF THE COEVOLUTION OF THE COMPUTER AND
SEMICONDUCTORS INDUSTRIES
Franco Malerba, Richard Nelson, Luigi Orsenigo
and Sidney Winter
L. Orsenigo, Pecs, july 2009
► The
analysis of the effects of industrial policies is
often based on static, equilibrium models, with
agents characterized by complete rationality.
Moreover, such analyses consider in most cases,
one specific industry, without fully taking into
account the effects that public intervention might
bear on related industries
L. Orsenigo, Pecs, july 2009
growing literature on industrial dynamics, with
heterogeneous agents, increasing returns and pathdependency
► even within this literature, policy implications have
been by and large neglected, particularly as formal
models are concerned.
L. Orsenigo, Pecs, july 2009
Antecedents
► The
Schumpeterian trade-off
► Network externalities
► Blind Giants, Narrow Windows and Angry
Orphans
L. Orsenigo, Pecs, july 2009
Microsoft case
► competition
is not within the market, but for the market:
temporary monopolies, provided that the entry of new
potential monopolists offering potentially superior new
technologies is not blockaded.
► Thus,
antitrust policies should consider not only the
immediate effects of the existence of a monopolist and of
its actions but also the predictions of alternative possible
futures (which might be very hard to predict indeed)
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► efficacy
of alternative policy measures designed to
combat monopoly (if deemed appropriate on
efficiency and political grounds), to promote
industry growth and technological change.
► In general, little is known about the efficacy of
industrial policies in dynamically related, coevolving industries.
L. Orsenigo, Pecs, july 2009
Aims
► Exploring
the effects of alternative policies on the
dynamics of two vertically-related industries in changing
and uncertain technological and market environments.
► “make or buy” decisions
► dynamics of market concentration in contexts
characterized by periods of technological revolutions
punctuating periods of relative technological stability and
smooth technical progress.
L. Orsenigo, Pecs, july 2009
History-Friendly Models
CLOSER RELATIONSHIP WITH HISTORICAL AND
EMPIRICAL ANALYSIS
► INDUSTRY-SPECIFICITIES
► PUT MORE RESTRICTIONS ON MODELS
► DERIVE TIME-PATHS, NOT “SIMPLY” LIMIT PROPERTIES
► FORMALIZE AN APPRECIATIVE ARGUMENT
► REPRODUCE A QUALITATIVE HISTORY: PROBING A
THEORY, NOT REPRODUCING REAL TIME SERIES
► BASIS FOR GENERALIZATIONS
► TOOL FOR THEORETICAL, “HISTORY-FREE”
INVESTIGATION
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VERTICAL INTEGRATION AND SPECIALIZATION:
THE CONCEPTUAL APPROACH
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Differences in firms’ capabilities and role played by the nature of the knowledge
base in an industry.
Through learning firms accumulate over time capabilities in specific
technological, productive and market domains.
Such competencies take time to be developed and are then typically sticky and
local.
Established capabilities may adapt only slowly to changes in technology and
demand and new capabilities more in tune with the new demand or technology
may be necessary.
When products are systems with various components and subsystems, the
capabilities of coordination and integration of these capabilities may be
relevant. This may provide an advantage to integrated firms.
The growth and dynamics of competencies in each one of two vertically related
industries influences the evolution of the other sector and shapes the dynamics
of vertical integration and specialization
L. Orsenigo, Pecs, july 2009
Competencies and selection
The time dimension:
 ompetencies take time to be developed and the previous history of the processes of
construction of those capabilities often is important in determining what firms can
and cannot do.
► decisions to specialize and to vertically integrate are not symmetrical:
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 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 efforts are required.
Thus, these decisions are not entirely flexible as time goes by.
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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.
market selection amplifies the impact of capabilities on the vertical scope of firms.
 If specialized firms have superior capabilities, selection will push for grater
specialization and vice-versa
 market selection decreases heterogeneity among firms.
The process of capability development over time depends on the vertical scope of an
industry:
 Specialized firms that compete with other specialized firms accumulate knowledge
and competence differently from vertically integrated firms.
 In turn, the process of capability development affects the rooster of potential
L. Orsenigo, Pecs, july 2009
entrants.
The history
►3
ERAS
► 1. late 1940s and early 1950s: the era of mainframe
computers and transistors.
► Early 1950s: entry of already existing firms: IBM,
the Bunch (Burroughs, Univac Rand, NCR,
Control Data, Honeywell), GE and RCA. In
Europe and Japan, Philips, and Siemens.
► IBM emerges as leader
L. Orsenigo, Pecs, july 2009
Vertical integration and specialization in
the transistor era
► At
the very beginning of the industry, most
computer producers were not integrated.
► second half of the 1950s and the early 1960s :
introduction of transistors and beginning of the
semiconductor industry:
 The largest firms (IBM, RCA and GE) were totally or
at least partially vertically integrated.
 The smaller firms purchased components on the
market.
L. Orsenigo, Pecs, july 2009
Integrated Circuits
► 2.
The invention and development of the integrated
circuits enabled further improvements in mainframe
computers and reduced barriers to entry in the mainframe
industry, stimulating the entry of new competitors to
IBM.
► ICs opened the possibility of designing minicomputers
► Governmental anti-trust suit carried on for 13 years by
the American Justice Department against IBM:
 June 1982: IBM “ unbundles” its software and peripherals
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Integrated Circuits (ctd)
With the introduction of integrated circuits IBM became fully vertically integrated into
semiconductors.
► As a vertically integrated company, IBM produced the new system 360. By the end of the
1960s IBM enjoyed a market predominance of 70% in the world’s general service
computer market.
► Other mainframe producers also partially integrated into integrated circuits.
► Three basic reasons for vertical integration:
 integrated circuits embedded system elements and thus required close co-ordination
between the system and the component producer in the design and development of
both components and systems.
 semiconductor designs became more and more “strategic” and key for system
development, and therefore their design, development and production was kept inhouse for fears of leakage of strategic information.
 the rapid growth of the mainframe market and later on of the minicomputer market
(1960s and 1970s) generated fears of shortages of various key semiconductor
components among some of the largest computer producers.
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Microprocessors
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Microprocessors enabled significant improvements in mainframes.
They made it possible to design personal computers.
Personal computers opened up a new demand which had not been touched by
mainframes: small firms and personal users.
The great availability of low-priced high power computer components, led to
the beginning of the microcomputer industry.
Apple Computer, Radio Shack and Commodore were all non-vertically
integrated specialized in microcomputers.
In 1978 the whole personal computer market was practically ruled by those three
firms which enjoyed together the 72% of the worldwide market.
However already by 1980, new start-ups were entering into the market with an
increase in competition and an intensification of selection.
In 1980 IBM decided to enter the production of microcomputer.
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IBM, Intel and Microsoft
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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 the launch of the 360 system in the
mainframe market.
IBM decided to buy its own components, peripherals and software from outside suppliers instead to
build them internally.
IBM needed to speed up microcomputer production and did not have advanced internal capabilities
in this respect. Moreover, also the software had to be developed independently from the hardware.
Only the assembly of 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 chips of Motorola or its
clones which were much more powerful (and used by the most of IBM competitors)
IBM required Intel to sign a standard nondisclosure agreement and, in 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.
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 aimed to lock the emerging market to
its operating software.
In this way, however, Microsoft and Intel were able to conquer the respective software and
microprocessor markets in few years.
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The PC Market
► The
huge unanticipated demand for microcomputers
quickly transformed the microcomputer industry:
established and start-ups companies swarmed into the
minicomputer market because it was relatively easy
developing or cloning the PC.
► In the late 1984, as output began to catch up with
demand, an industry shake-out occurred.
► With time, IBM role of coordinator of decentralized
technical progress by various suppliers weakened, because
a shared technological leadership emerged with Intel and
Microsoft.
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Vertical Disintegration
Vertically integrated computer producers-- including IBM-- exited
from large scale production of semiconductor components.
Dis-integration took place because the new demand for
semiconductors coming from personal computer producers had
grown greatly; in response, a variety of highly advanced
components were introduced by several merchant microelectronics
firms.
A key firm -Intel- emerged as the industry leader for
microprocessors, thus determining a de facto standard in the
semiconductor industry to which computer producers, out of
necessity, complied.
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The Model: An Overview
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At the beginning of the simulation, a given number of firms enters the market and begin
to design and sell computers.
Computers are defined as a mix of characteristics, i.e. cheapness and performance.
Computers makers are born specialised and buy components on the marketplace from
specialized component suppliers. The design of semiconductors is based on the available
component technology, i.e. transistors.
Component firms sell their products to computer producers (as a function of the quality
of their semiconductors) and to an external market, which is not explicitly modeled.
Computers are sold to heterogeneous groups of consumers as a function of their achieved
merit of design. At the beginning, component technology makes it possible to design
computers – mainframes - the characteristics of which appeal to consumers relatively
more interested in performance rather than in their price.
Computer firms’ sales are also influenced by phenomena of inertia and brand-loyalty
By investing profits in R&D firms improve the quality of their products. Some firms
grow, others lose market shares and eventually exit.
L. Orsenigo, Pecs, july 2009
Integrated Circuits
► Technological
discontinuities in component technology.
► First, integrated circuits- become exogenously available.
► This new technology allows for the entry of new
semiconductor firms.
► As they invest in R&D and the new technology improves,
they will gradually become more efficient than
competitors belonging to the older generation, eventually
displacing them.
L. Orsenigo, Pecs, july 2009
Microprocessors
► After
some more time microprocessors are introduced
and again new component firms enter the market.
► Microprocessors make it possible not only to design
better mainframes but also to design a new typology of
computers which appeal to new groups of customers
relatively more interested in the cheapness rather than in
the performance of the machines.
► A new generation of computer firms enters the industry,
opening up a new market – personal computers.
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Vertical integration
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The decision to produce component in-house should in principle be driven by
considerations related to the relative achievable quality of the components
designed in-house as compared to those offered by the specialist suppliers.
However, computer firms can only conjecture about the quality of the
components they might end up designing.
The decision to vertically integrate is led (probabilistically) by the relative size of
computer firms vis-à-vis (the largest) component producer.
 If computer producers are larger enough as compared to extant suppliers, they can
fund a much larger flow of R&D expenditures and achieve better quality.
 fears of supply shortages may induce vertical integration. Again, this is likely to be the
case if semiconductor firms are small.
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The decision to vertically integrate depends probabilistically on the age of the
component technology:
 Early stages: risks of getting stuck in an inferior trajectory
 Established trajectories: the probability that new, superior generations of components
may be frequently invented by component suppliers is lower.
L. Orsenigo, Pecs, july 2009
Specialization
► Vertical
disintegration is driven by a comparison between
the merit of design of the components produced in-house
vis-à-vis those made available by specialised
semiconductors producers.
► This is likely to happen in the early stages of the
development of a new component technology and as
semiconductor producers grow big enough to sustain a
high level of R&D expenditures.
► After signing a contract, the computer producer is tied to
the component firm for a given number of periods.
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The Model
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Computers
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Computers are defined as a point in the space of characteristics, cheapness (i.e.
the inverse of price) and performance.
As a consequence of firms’ R&D investment, the characteristics of computers of
a given type improve over time.
The position of a particular computer design at any time defines its “merit of
design” (Mod) or quality. In turn, computers result from the combination of two
main inputs, systems and components.
The level of the merit of design, Mod, is given by a CES function:
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

  1




  
(1)
with A > 1, 0 < t < 1 and r > -1. The elasticity of substitution is: = 1/ (1 + r) .
Mainframes PCs.
No diversification
CO M P U TE R
M od i , t

 A    m od i ,t

CO M P


 1    m od i ,t
S YS




L. Orsenigo, Pecs, july 2009
Demand for Computers
Customers of computers are characterized by their preferences about the two attributes
that define a computer design - performance and cheapness.
► There are two customer groups: “big firms” and “small users”
► Each customer group consists of a large number of heterogeneous subgroups. Within a
particular sub group customers buy computers valuing its "merit", compared to other
products. In addition, however, markets are characterized by frictions of various sorts,
including imperfect information and sheer inertia in consumers behaviour, brand-loyalty
(or lock in) effects
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

1

a
1
M

A
l
f
a

C
h
e
a
p
n
e
s
s

P
e
r
f
o
r
m
a
n
c
e
i
,
t
i
,
t
i
,
t
a
1
(2)
The propensity Li of computer i to be sold to a group of customers at time t is defined
as:
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(3)

L  M  1  S
► where Sit-1 is the market share; the probability Pri of the computer i to be sold to a
group of customers at time t is given by:
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

i ,t
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i ,t
i , t 1
P r i ,t 
L i ,t
L
(4)
From this firm – if selected - the submarket buys a number of computers equal to Mit.
i,t
i
L. Orsenigo, Pecs, july 2009
The market for components
Systems are designed in-house by computer firms, while components may be also
bought by specialized producers of semiconductors.
three different component technologies transistors, integrated circuits and then
microprocessors
At the beginning of the simulation and at the time of each technological
discontinuity a new cohort of firms (12 in this version of the model) enters the
market, producing components with the latest available technology.
The demand for components, faced by component specialized firms, comes from
two sources:
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External demand, not modeled explicitly
demand for components from computer firms which have decided to outsource
component production (specialized firms).
When a computer firm decides to outsource components production, 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 design of the components produced by each
supplier. Given uncertainty and imperfect information, this choice is partly
stochastic.
L. Orsenigo, Pecs, july 2009
Market for components
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Specifically, a specialized computer producer will “sign” a contract with a
component producer selected by using a probability function that considers the
technical quality of the components: the higher the quality of the component ,
the higher the probability of signing a contract with a computer producer.
CO M P
L i ,t

 m od
CO M P
i ,t
CO M P
CO M P
P r i ,t
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
L i ,t



(5)
CO M P
L i,t
where LitCOMP is the propensity of component producer i to be selected and
Pri,t is the probability of a supplier to be selected.
A component firm which signs a contract sells a number of components which is
related to the proportion to which components and systems combine in order to
build a computer (in the current parametrization, 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. 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 market.
L. Orsenigo, Pecs, july 2009
Firms’ behaviour and technical progress
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Firms start with a given (randomly drawn) mod and they start to sell make
profits and invest in R&D spending.
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. The price of components
charged by component suppliers is determined symmetrically by adding a fixed
mark-up to unit production costs.
R&D expenditures are calculated as . a constant fraction of profits
Technical progress: double draw scheme”. In each period firms draw the value of
their Mod from a normal distribution. The number of draws that any one firm
can take is set proportional to its R&D spending
In each period, the values of the Mod obtained through the firms’ draws are
compared with the current Mod, and the higher among these values is kept.
Thus, more draws increase the likelihood to get a higher Mod for both systems
and components.
L. Orsenigo, Pecs, july 2009

Public knowledge
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 knowledge 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 exogenously over
time. When a new technology is introduced, its corresponding 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 older technology. The rate of growth of public knowledge starts to slow
down as time goes by. 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 knowledge of the new
technology.
► 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 time t-1 of firm i and of the level of
publicly available knowledge, PK, at time t:
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
h

M
o
d

(
1

h
)

P
K
K
i
,
t
i
,
t

1
t
And
P K t  lim
K
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K

g t
 e K


1
 1 

nu  t  tm c K






 
t>tmcK, lim and nu are parameters and tmck is the date of introduction of the new component
technology.
L. Orsenigo, Pecs, july 2009
R&D
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Integrated producers enjoy some coordination advantages as
compared to specialized producers As a consequence, the
productivity of their R&D efforts on components is enhanced by a
spillover effect

R
&
D


c

s
p
i
l
l
o
v
e
r

R
&
D
i
,
t
i
,
t
i
,
t
C
O
M
P C
O
M
P
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cCOMP*m is the difference between the price of component in
the open market and its actual cost for the producer; it represents
savings gained by self-production. An integrated computer firm
allocate these resources to component R&D.
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Specialized computer producers invest all their R&D on systems
and obviously do not enjoy the coordination advantages.
Component suppliers spend all their R&D on the development of
components.
L. Orsenigo, Pecs, july 2009
►
Vertical Integration
Probability of integration:
Let:
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Q i ,t
 A geO fT ech K  b1
b2
Z i , t  m in 
;1   (
)
CO M P


w
biggestQ t


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where:
AgeOfTechK ( K =TR,IC,MP) = t – (Starting time of Technology
K); Qit is the sales of the computer producer; biggestQt COMP
is the sales of the largest component producers and w is a
parameter
Then:
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P r ob ( Integrate ) i , t 
B  Z i ,t
1  Z i,t
where B is a parameter. IfL.the
probability of integration is bigger
Orsenigo, Pecs, july 2009
than a number drawn from a uniform distribution (0-1), integration
Specialization
►
The probability of specialization for each firm is:
X i ,t
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 m ax M o d tC O M P  m o d Ci ,Ot M P 
 m ax 
,0 
CO M P


m
o
d
i ,t


where maxModCOMP is the higher component Mod available on
the market.
Then:
P r ob ( Specialize ) i , t 
A  X i,t
1  X i ,t
A is a parameter and if Prob(Specialize) is bigger than a number
randomly drawn by a uniform distribution, specialization will occur.
► A specialized computer firm may also decide to change its supplier,
if a better producer has emerged in the market. The procedure for
changing supplier follows the same rule for the specialization
process.
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L. Orsenigo, Pecs, july 2009
Exit
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Computer firms: the variable
Eit = (1-e)*lshr + e*shareit
is computed, where lshr is the inverse of the number of firms active
in the market at the beginning of the simulation (i.e. the market
share that would have been 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 < E, where E is a constant threshold, the firm exits.
The rule governing the exit of the semiconductor producers is
different and simpler. The probability of exiting of any one firm is
an increasing function of the number of consecutive periods in
which it doesn’t sell to a computer producer.
L. Orsenigo, Pecs, july 2009
Standard simulation
► Assumptions:
► the size of the
external market is relatively small in the
case of transistors and integrated circuits and significantly
higher for microprocessors;
► lock-in effects in demand are very important for
mainframes and much less so for both PCs and
components
► the introduction of microprocessors allows much higher
improvements in component designs as compared to the
older technology: this technological discontinuity is much
sharper than the previous one.
L. Orsenigo, Pecs, july 2009
The Standard Simulation: Results
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A dominant firm emerges quickly in the mainframe industry and becomes
vertically integrated.
In the semiconductor industry, concentration first rises as demand from
computer producers exert strong selective pressures and firms leave the market.
The decrease of the number of mainframe producers gradually softens
competition and the Herfindahl index declines in the component market.
Concentration begins to grow again as a vertically integrated monopolist comes
to dominate the computer market: component suppliers are left with no demand
from the mainframe firms and exit continues.
At the time of the introduction of integrated circuits, new semiconductor
companies enter the market and concentration drops sharply.
The dominant mainframe firm remains vertically integrated, because the external
market is not large enough to sustain a significant growth of the new entrants
and of the quality of their components. The absence of a demand from the
mainframe producer induces a shakeout and concentration gradually increases in
the semiconductor market
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The age of microprocessors
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Microprocessors constitute a major technological advance as compared to
integrated circuit and a large external market supports a significant improvement
in the quality of the new components.
the PC market opens up, generating a substantial new demand and fuelling
further advances in the merit of the components.
The computer leader decides to specialize
Competition in components: large external market
The establishment of a monopoly in the supply of components contributes
however to maintaining competition in the PC market, since all firms get their
microprocessors from the same source.
In the last periods of the simulation, as the microprocessors technology matures,
the incentives towards specialization become slightly less compelling and, in
some simulations, the mainframe firm and some PC producers decide to
vertically integrate
L. Orsenigo, Pecs, july 2009
History-Friendly Simulation: Results
L. Orsenigo, Pecs, july 2009
Effects of public policies in a dynamic
setting: key variables
► a)
the strength of increasing returns
► b) the timing of the arrival of the technological
discontinuities and their magnitude
► c) the degree of heterogeneity of agents, in
particular as it concerns consumers;
► d) the interactions between the upstream and
downstream industries.
► Policy ineffectiveness
► Indirect and unintended effects
L. Orsenigo, Pecs, july 2009
Supply side policies
► Fostering
the diffusion of knowledge
► support for public basic research
► Antitrust
► support the entry of new actors
L. Orsenigo, Pecs, july 2009
Demand side policies
support open standards so that lock –ins are
avoided;
► use public procurement in a selective way, so that
the most advanced technologies are supported;
► use public procurement as an additional market,
in order to provide larger markets and
opportunities for firms’ growth and innovation.
►
L. Orsenigo, Pecs, july 2009
“policy ineffectiveness”
► cumulative
nature of the market. Small initial
advantages tend to grow bigger over time and
catching up is almost impossible.
► Leaders do not only have a “static” advantage:
they run faster than laggards.
► From “leveling the playing field” to “positive
discrimination”? policies should make competitors
able to run faster than the monopolist, and not
just remove static disadvantages.
L. Orsenigo, Pecs, july 2009
Investment in basic research
Increase in the rate of growth of public
knowledge
► Faster integration in transistors and integrated
circuits; increase in integration in the
microprocessors era: better computers induce
higher demand and faster firms’ growth
► Great increase in the rate of technical change
►
L. Orsenigo, Pecs, july 2009
Favouring circulation knowledge
► Firms
can draw from existing techniques
► Little effect on concentration in mainframes (high
bandwagon)
► Concentration decreases in PCs and components
► Increase in the rate of technical change
L. Orsenigo, Pecs, july 2009
Antitrust
Antitrust intervenes when a firm has a market share > 90% and
breaks the monopolist in two companies.
► No effect: given strong lock-in effects, a new monopolist emerges
very quickly
► Antitrust intervenes also by reducing lock-in effects
► Effects:
►
 competition in mainframes
 Slower vertical integration
 Concentration grows in components market in the age of transistors and
integrated circuits
 Competition and specialization in all markets in the microprocessor era
 No effects on the rate of technical change
L. Orsenigo, Pecs, july 2009
► timing
of antitrust policy: “Early” intervention has
almost no effect because a new monopolist
emerges very soon. “Late” intervention generates
a duopoly, because increasing returns on the
supply side were fading away by that time.
► small and transitory effects.
L. Orsenigo, Pecs, july 2009
► cumulative
nature of the market. Small initial
advantages tend to grow bigger over time and
catching up is almost impossible.
► Leaders do not only have a “static” advantage:
they run faster than laggards.
► From “leveling the playing field” to “positive
discrimination”? policies should make competitors
able to run faster than the monopolist, and not
just remove static disadvantages.
L. Orsenigo, Pecs, july 2009
Support to entry of new firms
doubling the number of firms entering after each
discontinuity in the computer and in the
component market: No effect
► twelve new firms enter each market every forty
period. In this latter case, new firms enter having
the average merit of design present in the industry.
►
L. Orsenigo, Pecs, july 2009
periodic entry
► no
changes in mainframes.
► In microprocessors, periodic entry does not change the
leadership of the largest firm, but reduces industry
concentration by greatly increasing the number of firms
that are active and survive in the industry.
► bandwagon effects are weaker than in the mainframes
market; new entrants in the component markets compete
with a leader which is still building its dominant position
and they are therefore able to survive. The later cohorts
of entrants, though, find it increasingly difficult to
compete.
L. Orsenigo, Pecs, july 2009
Timing
► Why
can the entry of new firms – as contrasted with an
increase in the initial number of firms - limit the
tendencies towards monopoly even in the long run? If
increasing returns are sufficiently weak to allow for a
gradual process of concentration, the early new cohorts of
firms enter with a level of the Mod which is higher than
that attained by initial laggards and sufficiently high as
compared to what has been achieved by the emerging
leader, to provide them with a chance of surviving.
L. Orsenigo, Pecs, july 2009
► Moreover
the market size for microprocessors is
rather large, because it is composed by the
demand coming from the specialized mainframe
producers and PC producers, and by the external
market, so that the survival and growth of
successful new firms is possible.
L. Orsenigo, Pecs, july 2009
Support for entry of new firms in
microprocessors
► Herfindahl index
L. Orsenigo, Pecs, july 2009
Support for entry of new firms in microprocessors MP:
average Mod (avMod) and best mod (BEST MOD)
L. Orsenigo, Pecs, july 2009
Reduction of lock-ins and support for open
standards
Reduce bandwagon
► The effects on concentration are significant. The
Herfindhal index in both the mainframe and
microprocessor markets drops significantly. As a
consequence of the reduction in concentration in
microprocessors, also concentration in personal
computer is lower, because no microprocessor
leader is present boosting the growth of some PC
firms
►
L. Orsenigo, Pecs, july 2009
Support for open standards:
Herfindahl index
L. Orsenigo, Pecs, july 2009
Support for open standards:
integration ratio
L. Orsenigo, Pecs, july 2009
Selective public procurement
In the age of transistors and integrated circuits the
best component firm gets additional sales from
the external market
► Concentration increases in component market
► Slower integration
► When public procurement stops the leading
mainframe producer regains a major size
advantage : vertical integration takes place again public procurement has to be permanent
►
L. Orsenigo, Pecs, july 2009
Selective public procurement: simulation
► transistors
and integrated
circuits: Herfindahl index
► transistors
and integrated
circuits: best mod
L. Orsenigo, Pecs, july 2009
Permanent public procurement
► In
the transistor period, the mainframe industry is
not highly concentrated yet and not strongly
vertically integrated: more transistor firms survive
► In the integrated circuit period, concentration in
mainframes is already very high. The effect of
public procurement is to reinforce the existing
leadership in components.
► Lower vertical integration
L. Orsenigo, Pecs, july 2009
L. Orsenigo, Pecs, july 2009
Unintended consequences
L. Orsenigo, Pecs, july 2009
The creation of open standards in computers leads to the emergence of
concentration in components
open standards and elimination of the bandwagon effects reduces
concentration in all industries.
► lower concentration in mainframes entails a reduction in vertical
integration and an increase in the demand for microprocessors
from the previously integrated large mainframe producers.
► a de-facto standard concerning the interfaces between components
arises, showing itself in the form of the emergence of a bandwagon
in component demand.
► This market-driven increase in bandwagon in microprocessors
created by the additional demand from large specialized computer
producers generates concentration in the microprocessor markets.
► unintended consequence of policy.
►
L. Orsenigo, Pecs, july 2009
The creation of open standards in computers leads to the
emergence of concentration in components
1
0.9
0.8
MF
0.7
PC
0.6
CM P
0.5
0.4
0.3
0.2
0.1
0
1
14
27
40
53
66
79
92 105 118 131 144 157 170 183 196 209 222 235 248
F igure 1 – U nintended consequences: open standards and concentration . H erfindahl index
1
0.9
0.8
0.7
0.6
0.5
MF
0.4
PC
0.3
0.2
0.1
0
1
14
27
40
53
66
79
92 105 118 131 144 157 170 183 196 209 222 235 248
L. Orsenigo, Pecs, july 2009
Antitrust policy in computers leads to the emergence of a monopolist in a
related system market and the disappearance of a the merchant component
industry
►
►
►
►
►
►
an antitrust policy breaks the mainframe monopolist in two
one of the two producers diversifies into personal computers,
a new large producer enters this industry with a relevant brand name.
Because of its size, reputation and marketing capabilities, this producer is able to
increase the level of the bandwagon effect in the personal computer industry and
become the leader in this industry. This is a first unintended consequence of
public policy.
In addition, the new personal computer monopolist may become vertically
integrated into microprocessors.
This may lead to the disappearance of the microprocessor industry, if there are
no other external markets for semiconductors. This is the second unintended
consequence of the policy
L. Orsenigo, Pecs, july 2009
Antitrust policy in computers leads to the emergence of a monopolist in a
related system market and the disappearance of a the merchant component
industry
1
0.9
MF
0.8
PC
0.7
CM P
0.6
0.5
0.4
0.3
0.2
0.1
0
1
14
27
40
53
66
79
92 105 118 131 144 157 170 183 196 209 222 235 248
F igure 1 – U nintended consequences: antitrust, diversification and disappearance of the com ponent industry:
H erfindahl index
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
MF
0.2
PC
0.1
0
1
14
27
40
53
66
79
92 105 118 131 144 157 170 183 196 209 222 235 248
F igure 2 – U nintended consequences: antitrust, diversification and disappearance of the com ponent industry.
Integration ratio
L. Orsenigo, Pecs, july 2009
Open standards in systems lead to the
emergence of a merchant component industry
► highly
concentrated computer and PC industries (high
bandwagon) with large vertically integrated firms
► no external market for components: no component.
► policy of open standards in mainframes and PCs
decreases the bandwagon effect and increases
competition.
► switch to specialization emergence of an independent
merchant component industry
L. Orsenigo, Pecs, july 2009
L. Orsenigo, Pecs, july 2009
Conclusion
► policy
in dynamics, interdependent markets,
characterized by heterogeneous agents, cumulative
technical advance at the firm level, major technological
and demand discontinuities and demand with lock-ins
and network effects
► Potential policy ineffectiveness
► Side effects
► Unintended consequences
► Pharmaceuticals and patent protection
L. Orsenigo, Pecs, july 2009