Transcript EVOLUTIONARY PERSPECTIVES IN ECONOMICS

EVOLUTIONARY PERSPECTIVES IN
ECONOMICS
Luigi Orsenigo
University of Brescia
KITeS – CESPRI, Bocconi University
Open University
L. Orsenigo, Seoul, April 2008
Outline
Basic concepts and inspirations of evolutionary
economics
Methodology and the essence of the evolutionary
approach
Evolutionary Models of industrial dynamics,
innovation and technical change
Developments in Evolutionary Modelling
L. Orsenigo, Seoul, April 2008
BASIC CONCEPTS AND INSPIRATIONS
Antecedents: Marshall, Schumpeter, Alchian, etc..
The invisible hand and the natural selection
metaphor: competition like natural selection
(survival of the fittest)? (Milton Friedman)
Institutionalism: Veblen, Hodgson
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The “new” evolutionary economics
Nelson and Winter 1982
Innovation, technical change
Dynamics
Bounded Rationality
Organizations
Institutions
Schumpeterian competition
Economic growth
How is it that some kind of “order” emerges out of the actions of heterogeneous agents, who do not
understand very well the constantly and endogenously changing environment in which they live?
Dynamics first
Bounded rationality
Disequilibrium
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The Principles (from S. Winter)
1. Realism!
It may not be a necessity for good theory, but it is often a virtue at least at the prevailing margin. There
is no need to take off one head and put on another one when you step reading the business page
and start doing economics
2. Dynamics first!
To impose on dynamic theory the burden of supporting a pre-existing static equilibrium analysis, is
essentially to put on blinders, making it inevitable that obviously significant issues will be
overlooked
3. No free calculation!
It is an abiding scandal that the self-proclaimed science of scarcity routinely treats all forms of
deliberation and information processing as free. This scandal reaches Monica-gate proportions in
rational expectations and other sophisticated equilibrium concepts that implicitly endow each actor
with the ability solve every actor’s problem many times over.
4. Firms are profit seeking!
It is a true fact of nature that firms are typically profit seeking, but it is not a true fact of nature that
they are typically profit maximizing. Profit maximization is a theorist’s crutch and ought to be
abandoned when it is too stark to capture the reality of profit seeking or too cumbersome to
permit analysis of any but the most extremely stylized models
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.5. Innovation is always an option!
One thing a profit-seeking firm can do rather than optimize over a given set of
possibilities is to think of some new possibilities. Hence, every analysis of such
optimizing behavior deserves an asterisk leading to a footnote that says: unless, of
course, there is a better idea.
6. Firms are historical entities!
They typically display pronounced inertial or quasi-genetic traits (e.g. scale/ routines)
that are clearly persistent enough to shape their actions over interesting
prediction periods. They ought to be represented that way in theory, positioned in
model history the way real firms are positioned in real history.
7. Firms are repositories of productive knowledge!
In most contemporary societies they are in fact the key repositories of technological
and organizational knowledge and among the key agents of historical change. The
storage and advance of knowledge, the maintenance and improvement of
organizational capabilities, are complementary roles.
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8. Progress is co-evolutionary!
Technological and organizational innovation is generated by a variety of firmlevel search processes. But firms do not search independently, they look to
rivals, suppliers and customers for ideas, technologies and practices. And
these firm and industry processes go forward in the context of a variety of
public and private institutions and programs, which in turn are shaped by
the firms. I could tell you that itís really simpler than that, but That Would
be Wrong.
9. Anything can happen for a while!
As Schumpeter said, only when things have had time to hammer logic into
men is it safe to assume that some level of rationality will characterize
economic outcomes. Market discipline and economic natural selection
constrain outcomes over time, but in the short run anything can happen.
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The Evolutionary Approach
Analysis of changing systems
Change is partly exogenous, but partly endogenous
Change is partly stochastic and partly deterministic
Agents are different, do not understand perfectly the world and cannot look too far
ahead
Selection
Learning
Institutions
Methodological commitments:
start from stylized facts
empirically-based assumptions
appreciative theorizing
models
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The Evolutionary Metaphor
Heterogeneous Populations (agents, routines, technologies, etc)
Selection: define fitness and how fitness selects among “things”. But fitness
can be multidimensional, may change over time (Hyper-selection, coevolution) and may be partly endogenously determined.
Units of selection: genotypes and phenotypes
Mechanisms of selection
Adaptation and variation: bounded rationality, learning and discovery
Does selection optimize?
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Applications
Economic History and History of Technology (Rosenberg, Chandler, Galambos, Mokyr, Vincenti,
Basalla, Freeman…): technology and organizational institutional forms co-evolve over time
Business and Management: (Teece, Utterback, Rosenbloom, Pisano, Henderson, Winter…..):
competence-based theories of the firm
Individual and Organizational Learning (Dosi, Marengo, Malerba…)
Consumer Behaviour (Dosi)
Industrial Organization: (Dosi, Malerba, Klepper, Metcalfe…..):
- empirical studies of the evolution of particular industries
Innovation studies (Freeman, Pavitt, Cantwell, Archibugi,….)
Industrial dynamics
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Applications (ctd.)
Growth: (Dosi, Silverberg, Verspagen…)
Trade: (Dosi, Verspagen, Cantwell..)
Policy: (Metcalfe, Winter,….)
Methodologies:
Case Studies
Experimental Economics
Econometrics
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Evolutionary Models of Industrial
Change
Build a formal argument to reproduce and “explain”
specific stylized facts
The argument is derived from appreciative theorizing
Dynamic stochastic systems: when analytic treatment is
impossible, simulate the model
Derive simplified, compact versions of the model and
solve it analytically
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Simulation
Heuristic technique, widely used in other sciences
Inductive approach
Theory-driven and disciplined
Problems of validation: robustness, sensitivity
analysis, ability to reproduce facts, calibration
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Nelson and Winter 1982, Winter 1984: Schumpeterian competition
Heterogeneous firms, characterized by capital stock and routines, produce, invest and
search for new techniques
Invest in R&D or imitation a fraction of turnover
Double draw scheme: first draw from a distribution to determine whether the effort
was successful or not; if yes, draw from another distribution to determine the
extent of the improvement
Produce and sell with the new technique, determine profits
More profitable firms, invest more in capital stock and R&D and grow (success breeds
success)
Markov process
In Winter 1984: entry, exit
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Applications and results
Emergence of concentration in industries undergoing technical change
Endogenous market structure: concentration increases with conditions
of opportunity, appropriability and cumulativeness (technological
regimes)
- Technical change is higher in concentrated industries
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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 (Sources of industrial
advantages)
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The Evolution of the Computer
Industry
Four eras:
early experimentation and mainframes (transistors)
introduction of integrated circuits and subsequent development of minicomputers.
personal computer, made possible by the invention of the microprocessor.
networked PCs and the Internet.
Discontinuities concerning both components technology (transistors, integrated
circuits, and microprocessors) and the opening of new markets (minicomputers,
PCs).
One firm - IBM - emerges as a leader in the first era and keeps its leadership also in the
successive ones, surviving every potential "competence-destroying" technological
discontinuity.
In each era, however, new firms have been the vehicles through which new
technologies opened up new market segments.
The old established leaders have been able to adopt the new technologies and - not
always and often facing some difficulties - to enter in the new market segments,
where they gained significant market shares but did not acquired the dominant
position they previously had.
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Questions
What determines the emergence of a dominant
leader in the mainframe segment?
What are the conditions that explain the
persistence of one firm's leadership in
mainframe computer, despite a series of big
technological "shocks"?
What allowed IBM to enter profitably into new
markets (PCs) but not to achieve dominance?
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The era of transistors, entry and the
mainframe industry
At the beginning, the only available technology for computer designs is
transistors.
N firms engage in efforts to design a computer, using funds provided
by "venture capitalists" to finance their R&D expenditures.
Some firms succeed in achieving a computer that meets a positive
demand and begin to sell. This way they first break into the
mainframe market. Some other firms exhaust their capital
endowment and fail.
Firms with positive sales uses their profits to pay back their initial debt,
to invest in R&D and in marketing.
With R&D activity firms acquire technological competencies and
become able to design better computers. Different firms gain
different market shares, according to their profits and their decision
rules concerning pricing, R&D and advertising expenditure.
Over time firms come closer to the technological frontier defined by
transistor technology, and technical advance becomes slower.
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The introduction of microprocessors
After a period t', microprocessors become
exogenously available. This shifts the
technological frontier, so that it is possible to
achieve better computer designs.
A new group of firms tries to design new computers
exploiting the new technology, in the same way it
happened for transistors.
Some of these firms fail. Some enter the mainframe
market and compete with the incumbents.
Some others open up the PC market.
Incumbents may choose to adopt the new
technology to achieve more powerful mainframe
computers.
Diversification in the PC market
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Computers in the space of
characteristics
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Customers and Markets
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•
•
•
Computers are offered to two quite separate
groups of potential customers:.
"large firms", greatly values performance
and wants to buy mainframes.
"individuals", or "small users", has less need
for high performance but values cheapness.
It provides a potential market for personal
computers.
Each of the two user groups requires a
minimum level" of performance and
cheapness before they are enticed to buy any
computer at all. Then, the value that
customers place on a computer design is an
increasing function of its performance and its
cheapness.
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Demand
• The probability, Pi, that a particular submarket will buy a computer i
is:
• c0 is specified so that the sum of the probabilities adds to one.
• Mi denotes the "value" of computer i.
• "mi" is the market share of the firm who produces computer i
• the market share variable can be interpreted either in terms of a
"bandwagon" effect, or a (probabilistical) lock-in of consumers who
previously had bought products of a particular brand.
• The constant parameter d1 assures that even computers that have
just broken into the market, and have no previous sales, can attract
some sales.
• "A" is the advertising expenditure of a firm.
• The constant parameter d2 performs here a similar role to d1 for
firms who have just broken into the market and have not yet
invested in advertising.
• If consumers in a particular submarket decide to buy computer i,
then M is the number of machines they buy.
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Innovation
In every period the "merit " of the computer each firm is
able to achieve along its technological trajectory -performance and cheapness— improves according to:
R, is the firm's R&D expenditure, where i=1 is
performance and i=2 is cheapness.
T represents the number of periods that a firm has been
working with a particular technology.
Li-Xi, measures the distance of the achieved design from
the technological frontier. The closer one gets to the
frontier, the more technological progress slows down,
for every given level of R&D expenditure. There is also
a random element to what firm achieves, given by e.
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Profits, prices, R&D
•
•
•
•
•
•
Profits: t = M*p – M*k,
Price: pt= k * (1+t)
Mark-up: t = 0.9*t-1 + 0.1*(mi/( - mi ),
Where  is demand elasticity
R&D expenditures: Rt, =  * t (1- )
Advertising:
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The dynamics of concentration
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Counterfactuals
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Counterfactuals 2
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Policy experiments
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Theoretical experiments: failed
adoption
A d o p ti o n s
2
0 ,9
1 ,8
0 ,8
1 ,6
0 ,7
1 ,4
0 ,6
1 ,2
0 ,5
1
0 ,4
0 ,8
0 ,3
bw 4 ds 1
0 ,2
bw 1 ds 3
bw 1 ds 3
0 ,4
145
137
129
121
113
105
97
89
81
73
65
57
49
41
33
25
0
17
0 ,2
0
9
bw 4 ds 1
0 ,6
0 ,1
1
number of f irms
H e r fi n d h a l I n d e x fo r o l d m a r k e t
1
1
11
21
31
41
F i r st g e n e r a ti o n fi r m s
51
61
71
81
91
101
111
121
131
141
131
141
S e c o n d g e n e r a ti o n fi r m s
4
10
9
3 ,5
8
2 ,5
2
1 ,5
bw 4 ds 1
7
bw 1 ds 3
6
number of f irms
number of f irms
3
5
4
bw 4 ds 1
3
bw 1 ds 3
1
2
1
0 ,5
0
0
1
11
21
31
41
51
61
71
81
91
101
111
121
131
141
1
11
21
31
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51
61
71
81
91
101
111
121
Experimental Users
A d o p tio n s
2
0 ,9
1 ,8
0 ,8
1 ,6
0 ,7
1 ,4
0 ,6
1 ,2
0 ,5
number of f ir ms
H e rfin d h a l In d e x fo r o ld m a rke t
1
1
0 ,4
0 ,8
e x p e r 0 .1
0 ,3
e x p e r 0 .2
0 ,2
e x p e r 0 .3
e x p e r 0 .2
0 ,4
e x p e r 0 .3
145
129
137
113
121
97
105
81
89
65
73
49
57
25
33
0
41
0
17
0 ,2
1
0 ,1
9
e x p e r 0 .1
0 ,6
1
11
21
31
41
F irst g e n e ra tio n firm s
51
61
71
81
91
101
111
121
131
141
131
141
S e co n d g e n e ra tio n firm s
4
10
9
3 ,5
8
3
e x p e r 0 .1
7
2 ,5
2
1 ,5
number of f ir ms
number of f ir ms
e x p e r 0 .2
6
e x p e r 0 .3
5
4
1
e x p e r 0 .1
3
e x p e r 0 .2
2
e x p e r 0 .3
1
0 ,5
0
0
1
11
21
31
41
51
61
71
81
91
101
111
121
131
1
141
11
L e a d e rsh ip o f first g e n e ra tio n in O ld m a rke t
21
31
41
51
61
71
81
91
101
111
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L e a d e rsh ip o f se co n d g e n e ra tio n in O ld m a rke t
1
1
0 ,9
0 ,9
0 ,8
0 ,8
f requenc y
0 ,6
0 ,5
0 ,4
f requenc y
0 ,7
0 ,7
0 ,6
0 ,5
0 ,4
e x p e r 0 .1
0 ,3
e x p e r 0 .1
0 ,3
e x p e r 0 .2
e x p e r 0 .2
0 ,2
0 ,2
e x p e r 0 .3
e x p e r 0 .3
0 ,1
0 ,1
0
0
1
11
21
31
41
51
61
71
81
91
101
111
121
131
141
1
11
21
31
41
51
61
71
81
91
101
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111
121
131
141
Pharmaceuticals
• Innovation as a quasi random process
Innovation and imitation
• Market fragmentation
• Low concentration, despite high R&D and
marketing
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Pharmaceuticals
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•
•
•
•
Random search, patent
Development
Product launch and marketing
Imitation
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Counterfactuals
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Costs and economies of scale
Market size and demand growth
Market fragmentation
Innovative opportunities
Patent protection
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CHANGING VERTICAL SCOPE OF
FIRMS IN
OF THE COMPUTER AND
SEMICONDUCTOR INDUSTRIES
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Understanding the determinants of specialization and
vertical integration in related industries
in uncertain and dynamic environments,
characterized by technological discontinuities.
Major factors: capabilities, technical change and market
size
Co-evolutionary processes
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A capability-based, dynamic theory of vertical integration and specialization
Competence accumulation in specific technological and market domains
Competence destroying technological change
Coordination and integration capabilities
Capabilities take time to develop
Decisions to specialize and vertically integrate are not symmetrical
The distribution of capabilities among all industry participants are relevant
Market selection amplifies the effects of capabilities on the vertical scope of
firms
The identity of firms affects the development of capabilities
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SPECIALIZATION AND INTEGRATION
DECISIONS
VERTICAL INTEGRATION decision is led by:
- the relative size of the computer firm compared to the
largest SC component producer (capabilities, R&D,
innovation)
- the age of the SC component technology
SPECIALIZATION decision is led by:
Comparison between the quality of SC components
produced in-house and the quality of SC components
available on the market
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History Friendly Simulation
Figure 1b: integration ratio
Figure 1a: Herfindahl index
1,2
1,2
1
0,8
0,6
1
MF
PC
Cmp
0,8
mf
0,6
pc
0,4
0,4
0,2
0,2
0
0
1 19 37 55 73 91 109 127 145 163 181 199 217 235
1 17 33 49 65 81 97 113 129 145 161 177 193 209 225 241
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TESTING THE MODEL:COUNTERFACTUALS
1. Does lack of external markets lead to more vertical
integration?
2. Do no demand lock-ins in mainframes lead to more
specialization ?
3. Do no demand lock-ins in semiconductors lead to more
vertical integration ?
4. Does a minor technological discontinuity in
microprocessors lead to more vertical integration?
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No external market for SC
1,2
Figure 2a: Herfindahl index
Figure 2b: integration ratio
1
1,2
MF
0,8
PC
1
Cmp
0,8
0,6
0,4
0,6
mf
0,4
pc
0,2
0,2
0
0
1
20 39 58 77 96 115 134 153 172 191 210 229 248
1
19 37 55 73 91 109 127 145 163 181 199 217 235
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Policy exercises
Antitrust
Public procurement
Investment in basic research
Unintended consequences
- The creation of open standards in computers may lead to the
emergence of concentration in components
- Antitrust policy in computers may lead to the emergence of a
monopolist in the PC market and the disappearance of a the
merchant component industry.
-Open standards in systems may lead to the emergence of a
merchant component industry
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User- Produce relations
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Dynamic matching
Specific and generic bonus
Contact length
Exclusive contracts
Lead users
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