RA1: Emergent Behavior and Strategic Simulation
Price Competition and Industry Dynamics

New talk and paper at the

Third CMIE/CIBER Conference, September 12-13, 2003
UCLA Anderson School of Management, Los Angeles, CA
Conference Theme: Managing in the Global Information Economy
Conference Chairs: Uday S. Karmarkar and Uday Apte
(http://www.anderson.ucla.edu/research/cmie/conf2003/index.html)

Dynamics of Competition in Price and Quantity in Two-Tier Serial Supply Chains:
An Exploratory Analysis Using Agent-Based Computational Methods
Chris Langdon (csl@ebizstrategy.org) and Riyaz Sikora (rsikora@uta.edu)

IT innovation enables industry structure change, which, in turn, may require new business strategies. Examples include electronic markets, which increase price competition, and Web services, which can ease outsourcing, enabling specialization strategies. To explore, therefore, the dynamics of competition between integrated and specialized firms that compete in quantity (Cournot) and price (Bertrand), we have developed a two-tier, serial, symmetric supply chain model.
Economic theory suggests that specialization can be advantageous. Specialized firms enjoy, for example, lower production cost. However, they are also more reliant on market interaction, which can increase transaction cost and expose them to the risk of market failure through, among other things, a lack of liquidity in input markets. These problems may be amplified when intense price competition forces exits from the market. Many supply chain models ignore price competition by pointing to the Bertrand paradox. However, while companies may try their best to avoid competing on price, economic data suggests that they do not succeed all the time. The US producer-price index, for example, a measure of inflation at the wholesale level, fell a seasonally adjusted 1.9% in April 2003--the larges decline on record (Department of Labor 2003).
We have formalized competition between integrated and specialized firms as a complex adaptive system because it allows us to model industry structure and transaction cost as endogenous variables. The behavior of firms and their interaction is based on micro-economic cost theory and the theory of non-cooperative games. Experiments have been conducted using discrete event simulation.

(Created by: csl, 02/14/04; last modified by: csl, 07/02/04.)

P1: Cournot Competition

New talk and paper at the

Eighth Computing Society Conference, January 8-10, 2003, Chandler, Arizona. Conference Theme: Optimization and Computation in the Network Era
(http://www.informs.org/)

Competition in Business Networks with Industry-Level Feedback
Chris Langdon (clangdon@marshall.usc.edu) and Riyaz Sikora (rsikora@uta.edu)

Firms specialize to benefit from lower fixed cost, less assets and increased flexibility. However, specialization makes firms more dependent on industry structure and the behavior of suppliers and channel partners. This dependence can increase uncertainty and risks, such as market foreclosure.

We have developed a model to study the interdependence between fixed cost advantages of specialization at a firm level and industry-level specialization.
Economic theory suggests that specialization can result in lower production cost. Furthermore, new digital interactive technology--such as the Internet, Web, and Web services--reduce external coordination more than internal once hence providing an additional incentive to specialize. However, specialized firms are also more reliant on market interaction, which can increase transaction cost and expose them to the risk of market failure.
First, suppliers may not exist. In the economics literature, this is often referred to as a "closed" industry. Second, even in an "open" network, if there are too few suppliers, they could use their market power to make inputs prohibitively expensive or refuse to sell inputs at all-foreclose the market.
We have formalized this problem as a complex adaptive system because it allows us to model industry structure and transaction cost as endogenous variables. The behavior of firms in the model is based on micro-economic cost theory. Interaction between firms is modeled as a repeated Cournot game. Experiments have been conducted using discrete event simulation. We generated results for a two-tier serial supply chain with a symmetric structure.

(Created by: csl, 02/14/03; last modified by: csl, 10/14/03.)