Co-evolution of demand and supply under competition

B. Vermeulen, A.G. Kok, de

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Abstract

In this paper, we derive strategies to enforce dominance in a business-to-consumer market with heterogeneous, competing products, while the market segmentation evolves through interaction of demand and supply. By using evolutionary economic notions, we extend operations management studies on manufacturing facing demand diffusion. We arrive at a synthesis of a Forrester delay manufacturing model and a technology substitution-diffusion model and show that the actual operationalization of product attractiveness, reflecting what consumers deem important, as well as the responsiveness of production capacity scaling greatly determine the market dynamics and asymptotic outcome. We obtain analytic results on absolute dominance in case of the constant inherent attractiveness of products, say technical performance, and numerical results on instability and quasi-stability in case of more encompassing definitions of attractiveness involving price and service level. We conclude, in general, that in establishing market dominance, firms should focus on timely entry to capture first-buyers, high responsiveness and predatory pricing. Scale advantages and resilience through responsiveness are essential in obtaining and subsequently retaining the market share when other firms already provide or are about to enter with technically superior products. We also hint on how to extend our model to study several other issues on industry dynamics.
Original languageEnglish
Place of PublicationEindhoven
PublisherTechnische Universiteit Eindhoven
Number of pages16
ISBN (Print)978-90-386-2074-9
Publication statusPublished - 2009

Publication series

NameBETA publicatie : working papers
Volume279
ISSN (Print)1386-9213

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