Product differentiation and product complexity: A conceptual model and an empirical application to microcomputers

We propose a model of product technology that describes products as complex systems.Complex systems are made out of elements that function collectively according to the way theyare put together within a system’s architecture. Different choices of elements translate intodifferent levels of functional attributes and price. New variations in product design occur throughmutations at the level of elements (“genotype”) while pre-market trials and market selection occurat the level of costs and functions (“phenotype”). In this model, both vertical and horizontaldifferentiation can be represented. Vertical differentiation can be understood as stemming fromthe use of expensive elements in high-performance product designs. Horizontal differentiationcan occur when different, complementary combinations of elements yield mixes of functions eachof which is preferred by a different user group.Microcomputers provide us with an interesting example of an artefact that has evolved intodifferent varieties through a series of component innovation and recombination (Langlois andRobertson 1992). Databases on component characteristics of over 4000 different microcomputersfrom 1992 to 1997 are analysed on product and price differentiation using entropy statistics. Dataon price allow us to distinguish between variety reflecting vertical differentiation and varietyreflecting horizontal differentiation. This distinction is of importance when one wants tounderstand the diffusion of new component technologies through either product differentiation orprice differentiation. Other issues regarding modelling and measurement of complex systems arediscussed in the final section.

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