Industry dynamics with diversity in firms’ catch-up strategies and demand conditions: a simulation approach^*

* Earlier versions of this paper were presented at the 2011 DRUID Conference held in Copenhagen from June 15 to 17; the 2009 Asialics Conference held in Hong Kong from July 6 to 7; and the 2013 Asia-Pacific Innovation Conference held in Taipei from December 6 to 7.

ABSTRACT

Dynamic simulations have been conducted to analyze the performance dynamics of entering firms using three different entry strategies (i.e. path-following, PF, stage-skipping, SS, and path-creating/leapfrogging, PC) under four different demand conditions (i.e. fixed demand, fluctuating demand with constant average, expanding demand with constant growth, and fluctuating demand with constant growth rate). One of the key contributions of this study is clarifying the role of diverse entrant strategies and demand conditions in industry dynamics. First, we find that market expansion is favorable to incumbent firms, whereas market fluctuation is favorable to entering firms. Among the three entry strategies, the PC strategy is often best, whereas the PF strategy is the worst. However, the gap in catch-up performance is reduced if the demand condition is of the fluctuating demand variety. Fluctuation of demand works better for PF strategy firms compared with SS and PC firms, which would suffer during downturns, particularly during the early stage of entry. By contrast, the gap between each strategy increases under expanding demand with constant growth rate.

KEYWORDS:

• Catch-up
• demand conditions
• leapfrogging; simulation analysis
• industry dynamics

JEL CLASSIFICATION:

• F15
• O14
• O19

Acknowledgements

The author would like to thank the guest editor Mario Pianta as well as Alessandro Marino, Oliver Baumann, Patarapong Intarakumnerd, and Jinhyo Yoon for their beneficial comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

* Earlier versions of this paper were presented at the 2011 DRUID Conference held in Copenhagen from June 15 to 17; the 2009 Asialics Conference held in Hong Kong from July 6 to 7; and the 2013 Asia-Pacific Innovation Conference held in Taipei from December 6 to 7.

1. The figure is drawn using the equations in Section 3.

2. Kydland and Prescott (1982) assumed that at least one period is required for the construction of new productive capital.

3. Y⁰ is a constant.

4. RA₀ is the coefficient representing the degree of risk aversion when a new firm enters the market.

Additional information

Funding

The authors gratefully acknowledge the support provided by the National Research Foundation of Korea [grant number NRF-2016S1A3A2923769].