To innovate or not to innovate?

In this paper, we analyze the evolution of output decisions of adaptive fir ms in an environment of oligopolistic competition. The firm might either ch oose to produce one of several existing product variants or try to establis h a new product variant on the market. The demand for each individual produ ct variant is subject to a life cycle, but aggregate demand for product var iants is constant over time. Every period each firm has to decide whether t o produce the product again, introduce a new product variant itself (which generates an initial advantage on that market), or follow another firm and change to the production of an already established product. Different firms have heterogeneous abilities to develop products and imitate existing desi gns; therefore, the effects of the decision whether to imitate existing des igns or to innovate differ between firms. We examine the evolution of behav ior in this market using an agent-based simulation model. The firms are end owed with simple rules to estimate market potentials and market founding po tentials of all firms, including themselves, and make their decisions using a stochastic learning rule. Furthermore, the characteristics of the firms change dynamically due to "learning by doing" effects. The main questions d iscussed are how the success and the optimal strategy of a firm depend on t he interplay between characteristics of the industry and properties of the firm.