Lecture 6

Question 1

What are stylised facts?

Answer 1

Empirical observations which date identified in a small number of observations
If these stand up to imperial testing then they become established facts
E.g observing an Apple fall from a tree

Question 2

What conditions must be met for one theory to be accepted over another

Answer 2

Be consistent with an existing set of observations

Be consistent with new/ other observations

Question 3

What are the stylised facts of industry evolution

Answer 3

Occasionally new industries are born 
These can have major impacts on the wider social and political system 
Schumpeter 
New change leads to structural change 
New skills 
Knowledge

Question 4

What is the relevance of kondratiev waves o ILC

Answer 4

Illustrate the rise and fall of economic fortunes
Steam engine, rail, electrical engineering, auto, it

All waves show
Prosperity recession
Depression
Improvement

Takes approx 55yrs

Question 5

What is an invention

Answer 5

A new/ novel engineering or scientific discovery that is commercially applied in the form of a new product or service

The first firm to do this is the radical innovator

Question 6

What is diffusion

Answer 6

The degree of economic and social impact is determined by the extent to which the invention diffuses across society

In this process many incremental innovation occur

Question 7

Tell me about s shaped diffusion curves

Answer 7

Inflection point
Exponential growth up to inflection point
After we see a slowing down in the rate of adopters
M is the maximum potential adopters which is affected by social norms, laws and customs
M can be challenging to to estimate if the product is radical
Normal distribution explains up until inflection point

Question 8

What are the 6 stylised facts of ILCs

Answer 8

Product diversity peaks and falls
A rise and fall in the number of new market entrants
Over time producers devote increasing effort to process innovation and less to product
The most recent entrants account for a disproportionate share of product innovations
Shake out- the number of of producers grows, peaks and declines steadily despite growth in industry output
Rate of change Olof the market shares of largest firms slows and leadership of the industry stabilises

Question 9

What does vernon argue

Answer 9

The country of CA changes as the product matured and competition changes
Shows how the comparative advantage of production shifts between countries
Combines both demand and supply to explain international trade patterns
Dynamic approach
Recognised the mobility of factors and firms across national borders p

Question 10

What are some important assumptions of Vernons model

Answer 10

Information and knowledge are critical factors for the creation of radical new products
Inputs needed to produce the good changes over time
Market size and structure also play a role in determining patterns

Question 11

What is vernons model of globalisation

Answer 11

Over time the competitive advantage of production changes. The basis for this is the theory of international trade
As products mature both the optimal production location and sales changes

An exporter may become a net importer as the product standardised
Could be the same firm that moves cross borders

Question 12

What is Abernathy and utterbacks explanation

Answer 12

Link innovation patterns to development of industry structure
Initially highly competitive but becomes an oligopoly in maturity

Question 13

What is the dominant design explanation

Answer 13

New technologies have different options and ideas
One design comes to dominate
Explains the closure of innovative capacities
Opens up a link between product and process innovation

Question 14

What is Abernathy and utterbacks 3 stage model

Answer 14

Stage 1
High degree of uncertainty and fluidity
Uncertainty ends with emergence of a dominant design
Major market shakeout occurs amongst firms who develop alternative losing designs

Stage 2
Shift in competitive focus to cost competition and process technologies
Process innovation enables firms to exploit scale economies and there may be another shakeout

Stage 3
Maturity
Relative homegenity amongst firms
Focus on innovation is a gradual process

Question 15

What strategy predictions can be derived from Abernathy and utterbacks

Answer 15

Firm should evaluate safe of its life cycle and if
In takeoff- engage in radical product
In growth- engage in radical process and incremental product
If in maturity - engage in incremental process and product

Question 16

What difference do gort and keeper have

Answer 16

Do not support the dominant design hypothesis

Question 17

What does Klepper argue

Answer 17

What drives industry is ongoing process innovation
Firms differ with R+ D capabilities
R+D knowledge is cumulative and difficult to imitate by others
Profit fed back into more process R+D and the most innovative firms ultimately win

Question 18

What is the relevance of the R+D learning curve

Answer 18

As R+D costs fall, firms become better at process R+D
Virtuous cycle exists between R+D- sales - profit and growth
Path dependence- successful past innovators are more likely to be successful innovators in the future

Question 19

How does Rogers say the diffusion curve can be explained

Answer 19

Look at various traits
3 variables governing adoption behaviour

Personality
Socioeconomic
Communication

Question 20

What are the 5 categories of adopters

Answer 20

Innovators 
Early adopters 
Early majority 
Late majority 
Laggards

Question 21

What are the strategy predictions of demand side

Answer 21

Need to target different user types at different stages of the ILC
Key for successful diffusion of a new technology product is the targeting of new adopters

Question 22

What are the 3 main limitations of ILC

Answer 22

Existence of niches
Does not consider late entry
Reverse life cycles

Question 23

What are the implications of multiple niches

Answer 23

Assumes each firm has one target type
Each consumer type has a given preference set
Each consumer can switch membership

Is dominant design a special case?
More common is multiple niches
Each nice contains a distinct consumer type

Question 24

What are the implications of niches

Answer 24

Need to understand consumer groups
Do consumers face switching costs?

Firms can create stable market niches by innovating to specific groups

E.g transport sector and sub markets

Question 25

What implications does late entry have

Answer 25

Firms can create new niches in mature industries
This can challenge a dominant firms position
E.g fat food

Question 26

What is the reverse life cycle (Barry’s, 1986)

Answer 26

Stage 1) incremental development of back office functions
Stage 2) radical process innovations and org restructuring
Stage 3) sees radical product innovation

Question 27

What does Swann say about the challenges of projecting the market for a new technology

Answer 27

Tomorrow’s markets are just more developed versions of today’s but new needs applications and wants are different

We fail to recognise how path dependant demand for new technology is

Demand projections depend on the evolution of this technology but also of rivals which is not easy to foresee

Question 28

What does Swann say about epidemic models

Answer 28

Each time a new consumer is exposed to a new product or service their is a probably that they will be infected
The rate of new cases is proportioned to the product of the number infected and the number not infected

Good experience promotes diffusion while bad experiences retard diffusion

Question 29

What are price and quality effects

Answer 29

As it becomes cheaper more buyers are willing to adopt

Speed of diffusion depends on the rate of price decline and variance in WTP

Question 30

What does Swann say about bandwagon effects

Answer 30

The existence of a large and installed user base is often a powerful signal to some buyers that the technology is not longer risky

Penguin effect

Question 31

What does utterbacks and abernathy day

Answer 31

A firms innovation attempts will vary systematically with differences in the firms environment
Strong mutual relationships between a firms environment and its choice of strategy between the types of product and process innovation innovation it deploys

Question 32

What are the elements for a model of process development

Answer 32

Uncoordinated
Market expansion and redefinition results in frequent improvement
Great product diversity amongst competitors

Segmental
As industry and products mature, price competit j becomes more intense
Production systems designed for efficiency become rigid

Systemic
Selective improvement in process elements become increasingly more difficult

Question 33

What is a model of product development

Answer 33

Performance maximising
Rate of change rapid and large margins
High degree of uncertainty
Products non standard

Sales maximising
Uncertainty reduced
Becomes difficult to better past performance
Advanced technology becomes important

Cost minimising
Product variety reduced and increased standardisation
Bias for competition shifts to price
Relocation may occur

Question 34

What do gort and klepper identify as the 5 stages of market evolution

Answer 34

Stage 1
Commercial introduction of a new product by the first producer
Ends with a sharp increase of new competitors
Length depends on competitors ability to copy the innovation, market size and number of potential entrants

Stage 2
Sharp increase in the number of producers

Stage 3
Number of entrants is roughly balanced by the number of existing firms, leaving entry at approx O p

Stage 4
Period of negative net entry

Stage 5
A second period of 0 entry

Question 35

What does klepper say about dominant design?

Answer 35

It’s an imprecise concept that does not apply to all new products, especially ones where buyer tastes are diverse

Assumes firms will not attend to process innovation until product innovation has slowed

Automobile and antibiotic industry show improvements In process before a so called dominant design emerges

Question 36

What is kleppers model

Answer 36

First demand for anfirms product is assumed to condition its incentive to innovate , incentive to innovate is conditioned by the quantity demanded

Second firms are assumed to be randomly endowed with distinctive capabilities
All firms produce a standard product, they decide how much r+d to perform
Successful product innovators develop distinct product innovation to accompany the standard product
Each successful innovator can sell at higher. Price

Question 37

What implications does klepper find

Answer 37

The advantage of size in process R+D causes firm R+D to onrose over time and eventually puts entrants at a cost disadvantage that entry is foreclosed
After entry closes firms compete on the basis of their size and prowess
As firms exit the diversity of product R+D declines

Industry evolution and heterogeneity can be explained by firm capabilities and size

Question 38

How do gort and klepper define diffusion

Answer 38

Defined as the spread in the number of producers engaged in manufacturing a new product