Evaluating Market Attractiveness: Individual Incentives vs. Industrial Profitability

In this paper we employ an agent-based industry simulation model to study the effects of the interplay between individual firms’ market evaluation strategies on the extent of product innovations and overall industry development. In particular, we show that a homogenous industry consisting of companies with focus on historical profits yields high overall industry profits but is very unstable. The introduction of a single firm oriented towards market growth rather than profits is sufficient to trigger a severe drop in profits and a transformation towards an industry with strong market growth orientation and a large number of marketed product innovations. Furthermore we show that the degree of horizontal differentiation of product innovations from existing products is of significant importance for the individual incentives to adopt market growth orientation and the effects of such a development on overall industry profits.