Industry dynamics, technological regimes and the role of demand

Abstract

In this paper, we propose an industrial dynamics model to analyze the interactions between the price-performance sensitivity of demand, the sources of innovation in a sector, and certain features of the corresponding pattern of industrial transformation. More precisely, we study market concentration in different technological regimes and demand conditions. The computational analysis of our model shows that market demand plays a key role in industrial dynamics. Thus, although for intermediate values of the price-performance sensitivity, our results show the well-known relationships in the literature between technological regimes and industry transformation, we find surprising outcomes when demand is strongly biased either towards price or performance. Hence, for different technological regimes, a high performance sensitivity of demand tends to concentrate the market. On the other hand, under conditions of high price sensitivity, the industry generally tends to atomize. That is to say, for extreme values of the price-performance sensitivity of demand, we find concentrated or atomized market structures no matter the technological regime we are in. These results highlight the importance of considering the role of demand in the analysis of industrial dynamics.