Innovation Dynamics in a Monopsony Structure: Insights Based on a Simplified Model of the European Space Sector

Innovation Dynamics in a Monopsony Structure: Insights Based on a Simplified Model of the European Space Sector

Nikolaos Smyrlakis (European Space Agency, The Netherlands), Leopold Summerer (European Space Agency, The Netherlands) and Loretta Latronico (European Space Agency, The Netherlands)
DOI: 10.4018/ijstmi.2011010102
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Innovation is a widely recognised driver of markets for economic growth and technological progress. This paper investigates the innovation dynamics in a monopsony market with a governmental monopsonist. The research is based on an agent-based model published for a traditional, competitive oligopoly market structure and explains aspects of innovation dynamics, such as how innovation is created, how the strategies of imitation and innovation pay off, the diffusion of both strategies and factors that influence them. Following the Schumpeterian concept of emerging innovation as a relational good, the model includes a dynamical component of strategy changes for sellers, which depends on the success of the strategy of those with whom they are exchanging information. For the present work, the structure of this model has been adapted to represent the specific buyer-power situation of monopsony markets. By changing the connectivity of the network between buyers and sellers and by combining all buyers into one, the network is transformed into one that models a monopsony market. In simplified terms, part of the European space market has been described as such a monopsonistic market with a governmental quasi-monopsonist. The paper investigates how innovation dynamics change in such a market.
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1. Introduction And Objectives

Innovation is widely recognised a driver for economic growth and technological progress (Soete & Freeman, 2007; European Commission, 1995, 2004; Schumpeter, 1994; Akcomak & Ter Weel, 2009; OECD, 2007). As such it is usually associated with the currently predominant market structure, a free, open market with many sellers and many more buyers (Burks, 1969). Innovation conditions, innovation diffusion and innovation patterns have therefore been analysed and researched extensively in such markets, mainly in order to better understand how to influence these.

The present work attempts to extend the scope of this research to market situations that differ substantially from these traditional cases. Strong governmental needs in certain areas can create temporary monopsony markets. These tend to be limited in time since with market maturation, newly developed skills, services, tools and products create new markets and customers. However, during the monopsony period, governments usually try to use their special situation to spur innovation and create competitive advantage. Part of the space market can be described as showing the main elements of a governmental monopsony market (Szajnfarber & Weigel, 2007; Summerer, 2009).

This paper investigates the innovation dynamics in such a very specific market situation: a monopsony market with a governmental monopsonist. Section 2 therefore describes the theoretical foundations of innovation in a complex adaptive system and refers to the context of the research. Section 3 introduces the concept of a monopsony and then shows that some of the specifics of the European space sector are suitable to be modelled as a governmental monopsony market. Section 4 presents the methodology of the research. The market is modelled with an agent-based model with sellers (innovators or imitators) and buyers. Innovation as such is modelled as a dynamic vector. The use of a small-world network is motivated and described and the details of the adaptation of the original model from a transcription of a traditional, competitive oligopoly market structure to a monopsony market are provided, including a theoretical justification of the approach. Section 5 presents the results of model simulations, including the analysis how different strategies of the monopsonist influence the key innovation performance indicators of the overall market.

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