Competition on Rugged Landscapes: The Dynamics of Horizontal Differentiation
Competition through horizontal and vertical differentiation is central to managers and researchers alike. It is also a fundamentally dynamic process. Research on vertical differentiation studying technological innovation has long incorporated dynamic models of competition, but the same is not true for horizontal differentiation. This paper presents an agent-based simulation model that combines NK and discrete choice models to describe the dynamics of competition through positioning in horizontally differentiated markets. We find that in "rugged" markets with many consumer niches firms disperse to stable distributions where they serve individual consumer niches, there is little adaptation of products, and the effect of competition on performance is small. In contrast, in markets with homogeneous consumer preferences, competition causes persistently volatile situations where firms constantly jostle for favorable positions. Here, competition is highly detrimental to performance and market leaders are frequently dethroned. We conclude that the dynamics of competition matter and are influenced by the distribution of consumer preferences. Our results contrast with the equilibrium solutions commonly used to model horizontal differentiation in industrial organization. It also responds to a recent call in the NK literature for models of interaction between firms.