Innovation, market performance, and competition: lessons from a product life cycle model

Detailed knowledge on how innovation, market performance, and competition are intertwined serves as a basis for decisions of firms and policy makers. In the course of market evolution various changes take place of which the emergence of consumers' preferences and of the knowledge that is needed to meet these preferences with appropriate products are the most important ones. In order to model the market evolution and the resulting changes, Dosi's concept of technological paradigms and Winter's concept of technological regimes are integrated into a product life cycle model. The simulations performed with this model help to understand how the dynamics of market evolution shapes market performance and competition. The results of the simulation runs show a much more differentiated picture than economic intuition suggests and therefore give useful hints for firms' strategies and innovation policy. The most striking result of the simulation runs for entrepreneurial strategies is that there are markets that are only interesting for firms which want to enter a market to realize some profits and then exit again whereas other markets are only interesting for firms which want to survive in the long-run. For policy makers the simulation results show clearly that policy measures must be carefully designed in order to have the intended effects. (C) 2002 Elsevier Science Ltd. All rights reserved.