Why is network anatomy so important to characterize? Because structure always affects function.

– Steven H. Strogatz

Networks that seek commercial success must develop and maintain the ability not only to change in the face of highly competitive environments, they must also be able to adapt in ways that influence that environment.

– Robert Rycroft

“Everyday inventors don’t let themselves be limited like the rest of us do. They open their minds to the possibilities.”

– Rini Paiva, US National Inventors Hall of Fame

Yet the secret of evolution is the continual emergence of complexity. Simplicity brings a spareness, a grit; it cuts the fat. Yet complexity makes organisms like us possible in the first place.

– W. Brian Arthur

Natural selection may explain the survival of the fittest, but it can not explain the arrival of the fittest.

– Hugo De Vries


HW’s profit functions each period depend upon
  • The portion of users who have adopted the new system during previous periods, that is, the installed base of users for the new system;
  • The portion of users who adopt the new system during the current period, which will depend on the price at which HW chooses to set for new system hardware during the current period; and
  • The portion of resources SW chooses to dedicate to the production of new system content during the current period.

 

Numerical Example

The simulation model of the Hardware-Software Game was used to generate the optimal response for HW to various actions of SW (current levels of content availability).  The graph below indicates the portion of new adopters that will maximize HW’s current period profits for different sizes of the installed base of new systems users and for different availabilities of new systems content.  During earlier periods of adoption, HW’s choice of current period price is more strategic, in the sense that current levels of adoption will influence future period profits.  However, once adoption passes some threshold level, HW’s choice of current period price will affect current period profits much more so than profits in future periods.


HW_Optimal_Response_to_SW_Example

The model suggests that  HW will maximize profits with a faster pace of new system adoption, that is, by setting lower prices and generating greater levels of adoption, when

  • There is more content available for the new system,
  • The technology system exhibits stronger direct network effects, and/or
  • The installed base of new system users is larger.