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and design complementarities for radical product innovations in the ... Key words: product life cycle, innovation, competence, cameras, computers, hedonic ...... Windrum, P. and Birchenhall, C., 1998, Is product life-cycle theory a special case?
Successive cycles of innovation: the importance of user heterogeneity and design complementarities for radical product innovations in the camera and computer industries. Paul Windrum Manchester Metropolitan University Business School/ MERIT, University of Maastricht [email protected] Koen Frenken Urban and Regional Research Centre Utrecht (URU) University of Utrecht [email protected]

Abstract The paper examines successive cycles of innovation, prompted by the introduction of radical product innovations, in mature industries. Recent history in the camera and computer industries highlights the importance of user heterogeneity and design complementarities in driving new innovation cycles. Hedonic price analysis is used to test for distinct niches in these industries. The results indicate that distinct niches exist, populated by alternative product architectures and distinct sets of dominant firms. The paper addresses the implications of these case studies for current understanding of industry dynamics, market shake-outs, and the geography of global production in mature sectors.

JEL: L10; L60

Key words: product life cycle, innovation, competence, cameras, computers, hedonic price analysis. The authors would like to thank Colin Harding at the National Museum for Photography, Film and Television, Bradford for his assistance in identifying relevant sources of camera data, and Jeroen Kraaij and Pascale de Berranger for their research assistance. The usual disclaimers apply.

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1. Introduction The focus of this paper is the existence of new cycles of innovation within mature industries, and the factors that motivate these new innovation cycles. While authors such as Abernathy-Utterback (1975), Anderson-Tushman (1990), and Klepper (1996) disagree over the primary drivers of innovation patterns observed in industry life cycles, there is general agreement as to the essential phenomenology of the life cycle - i.e. the set of empirical observations that require explanation. According to Klepper (1996), competing explanations seek to account for six empirical observations. First, the diversity of competing versions of the product and the number of major product innovations reach a peak in the early phases of the industry life cycle and then fall over time. This pattern is associated with a rise and then fall of new market entrants. Second, at the beginning of the industry, the number of entrants may rise over time or else peak at the start of the industry and then decline over time. In both cases, the number of entrants eventually becomes small. Third, over time, producers devote increasing effort to process innovation and less to product innovation. Fourth, during the period of growth in the number of producers, the most recent entrants account for a disproportionate share of product innovations. Fifth, the number of producers grows initially and then reaches a peak, after which it declines steadily despite continued growth in industry output. Sixth, the rate of change of the market shares of the largest firms slows and the leadership of the industry stabilises. The camera and computer industries raise serious questions regarding our understanding of industry life cycles. According to these ‘stylised facts’, we would expect few or no new market entrants in a mature industry, for the market shares of the leading firms to be stable, and for no radical product or process innovations to occur. However, a new cycle of innovation occurred within the camera industry between the early to mid-1960s following the introduction of the SLR and 126 compact designs, and in the computer industry in the mid-1990s following the introduction of the portable computer design. The possibility of multiple innovation cycles occurring within industries raises important phenomenological and theoretical questions regarding key drivers and the conditions under which such events are likely to occur. Further, conventional wisdom regarding the strategic management of incremental innovations are also likely to require revision. Section 2 of the paper will consider the factors that saw a new round of radical product innovation in the camera and computer industries. These histories highlight the importance of heterogeneous consumer preferences and design complementarities as key explanatory factors. The success of radical camera and computer designs lay in their ability to cater for the needs and preferences of very different groups of users. In order to substantiate the discussion, section 3 empirically tests for distinct market niches in the two industries by conducting hedonic price regressions on data collected from contemporary camera and computer magazines. Using hedonic price analysis, one can identify whether distinct sets of shadow prices exist between different classes of products. Alternative sets of shadow prices reflect the different valuations of alternative user groups. They also reflect differences in costs if different sets of design complementarities exist across alternative product classes. Note that hedonic price analysis is best applied to competitive markets where prices closely reflect marginal costs and benefits, while prices in markets with imperfect competition are also affected by strategic interaction. Both the camera and the computer industries in the periods considered were competitive markets characterised by a large number of suppliers and

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the absence of a single, ‘dominant’ firm. Section 4 of the paper discusses the data sets used. Section 5 presents the results of Chow tests for parameter stability, and discusses qualitative differences between the estimated parameters of the estimated regression models. Section 6 concludes by drawing together the findings and reflecting on their significance for future theoretical and empirical research.

2.

The bifurcation of the camera and computer markets

In this section we consider the factors that prompted a new round of radical product innovation in the mature camera and computer industries. These new rounds of radical innovation resulted in a bifurcation of the market, provided opportunities for new market entrants, and posed difficulties for incumbent firms, the net result being a change in market leadership.

2.1

The camera industry

Prior to WWII, the 35mm camera market was dominated by German manufacturers, who developed the viewfinder design. The viewfinder design comprised a large viewfinder set above the taking lens through which the user composed the picture. Being separate from the lens and made of clear glass, the arrangement provided the user with good visibility. The chief drawback of this arrangement, however, is the introduction of parallax error between the scene viewed through the viewfinder and the image captured by the lens. Parallax error becomes increasingly noticeable at short and long distances, prohibiting close-up photography and sports/wildlife photography. Still, the design had advantages in terms of its size and weight compared to other designs that were available at the time, and enabled amateurs to take photographs in the majority of situations. Moreover, high quality glass lenses were widely available, as was the 35mm film format that it used. The late 1950s/early 1960s saw an important change in the amateur camera market. The introduction of the single lens reflex (SLR) camera and the 126 compact camera led to a bifurcation of the amateur market into two distinct niches - a division that continues to this day. While very different, both the SLR and 126 designs had their origins in the viewfinder design they were to supplant. In terms of technical specification, the SLR is arguably the most flexible configuration thus far developed. The design can cater for an extremely wide range of interchangeable lenses (from wide angle to telephoto) enabling the user to take any subject matter, interchangeable viewing/focusing screens incorporating (reflexive) light metering, a focal plane shutter that facilitates a wide range of exposure settings, and there are connections for hand-held and studio flash. The design uses the 35mm film format. The shape of the SLR camera is distinct to its forebear. Rather than a separate viewfinder, the SLR has a centrally placed dome that houses a pentaprism. This pentaprism allows the user to view the image formed by the lens when looking through an eyepiece at the back of the camera. The ability to view the actual image formed by the lens is important, both for improving the accuracy of composition and for eradicating the problem of parallax error, enabling all possible subject matter to be photographed.

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The first compact camera, the Kodak Instamatic 100, was introduced in 1963. Launched as the ‘peoples camera’, it was a major conceptual innovation. It was the first design explicitly developed and properly marketed to the mass market since the Kodak Box Brownie (Economics Intelligence Unit, 1979). Its designers stood back, thought of the needs of its target audience, and constructed a design that was suitable for it – namely, a cheap camera that was easy to use because it took as many of the ‘technical’ issues involved in taking a picture away from the user and automated them within the design itself. To this end, the Instamatic had a built-in lens with a fixed focal length of around 3m giving tolerably sharp results from 1.5m to infinity. For the first time, widespread use of plastic was made throughout its construction. Here Kodak took advantage of advances in plastic extrusion technology, developing a design that could be produced very cheaply and in large quantities. In addition to the body being made of plastic, the lens was made of plastic. Shutter speeds in the original model were limited to 1/90 second for bright conditions and 1/40 second for overcast conditions, so flash was needed in dim lighting conditions to illuminate subjects up to 4 meters from the camera. A second important simplification of the viewfinder design involved the substitution of the focal plane shutter with a small plastic blade placed directly behind the lens. In the context of a fixed lens design, the blade shutter offers a simpler and far cheaper alternative to the focal plane shutter. As important to the features that were included in the 126 design were the features that were omitted. In order to develop a cheap and easy to use camera, Kodak took away flexibility from the user by either building-in certain features, or else omitting them entirely. Hence, options such as interchangeable lenses, separate flash units, effects filters and many other accessories common to the SLR user were removed. The 126 and SLR designs were thus very different in their design architectures. A complementary and equally important radical innovation, launched alongside the Instamatic 100, was the 126 film cartridge. This was the first successful breakaway from the traditional roll film and 35mm film cassette. The camera was designed to operate with this specially designed cartridge, which housed a 35mm film with a black backing paper on which exposure numbers were printed. These, together with information on the film type located on the back of the cartridge, could be seen through a rectangular slot on the camera back. The 126 cartridge was designed to eliminate one of the consumer problem areas – that of loading the film. This, the marketers suggested, is the most common source of damaged films. The cartridge dropped into the body, the user did not need to load film on to a spool, or rewind the film after use1. The success of these two designs lay in the recognition that the amateur market comprised not one but two distinct types of users: the ‘serious hobbyist’ and the ‘snapshooter’. Where both had been served reasonably well by the ‘dominant’ viewfinder design, each group was better serviced by the respective SLR and 126 designs. The SLR is a sophisticated design that was specifically targeted at the serious hobbyist who enjoys photography as a means of creative and artistic self expression. The hobbyist values the quality of image reproduction and seeks to control the picture taking process to achieve an intended interpretation of the scene. By contrast, Kodak, when it introduced the first 126 model in 1963, targeted its design at the snapshooter. Snapshooters are infrequent users of camera equipment who typically use it to record key 1

The basic design of the compact camera purchased today is almost identical in specification to the original Kodak Instamatic. The one noticeable difference is the use of the traditional 35mm film cassettes as the 126 cartridge fell out of favour in the late 1970s.

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events such as holidays, birthdays and weddings. The snapshooter wishes to record an image with a camera that makes the picture taking process as easy as possible. (S)he is not interested in investing time and energy in learning how to improve their picture taking skills or about the mechanics of cameras. The success of the SLR and the compact camera lay in their designers recognising and catering for these distinctions within each of the respective designs. The new cycle of innovation, sparked by the introduction of radical product innovations, had two consequences. First, these radical designs were championed by new market entrants, initiating a new round of market entry and exit in the camera industry. Second, the geographic location of production shifted from Germany to Japan as new Japanese start-ups rapidly innovated in order to overcome the first mover advantages enjoyed by the ‘dominant’ German (viewfinder) manufacturers. Indeed, Japanese companies succeeded in becoming the new dominant market players in the industry. Many German manufacturers disappeared as amateur users replaced their viewfinder cameras with SLRs and 126 designs. The first SLR camera using 35mm film had been manufactured by an East Germany company, Ihagee, in the early 1950s, and in the mid-1950s SLR models were launched by Alpa in Switzerland, and Edixa and Contarex in West Germany. But it was new Japanese start-ups such as Asahi-Pentax, Canon, Nikon and Minolta who took the SLR design and rapidly developed it in order to break into U.S. and western European camera markets in the mid-1950s. They entered these foreign markets with well-built, competitively priced SLR cameras that contained many innovative features. For example, Asahi Optical Company launched the Asahiflex, the first Japanese SLR, invented the instant return mirror in 1954, and launched the Pentax (named after its seven sided prism) in 1957. In 1962 it set up a European operation in Belgium and two years later the Spotmatic model was launched with the world’s first through-the-lens metering system powered by a cadmium sulphide (CdS) cell2. Comparable examples of product innovation, founded on impressive advances in optical, mechanical and electrical engineering were found amongst other Japanese producers, who developed electronically controlled shutters and zoom lenses. Later, through the application of semiconductor technology to the SLR design, Japanese manufacturers introduced autofocusing, patterned metering, and programmed autoexposure. By the mid-1970s, Japanese manufacturers dominated the 35mm photography market. They were to subsequently use this success as the springboard to enter the professional camera niches. For example, Pentax and Minolta entered the professional markets in the late 1970s with the release of their own medium format camera designs. The history of the camera industry in this period is consistent with empirical observations of innovation cycles and industry shake-outs. Yet there is one important proviso: it occurred in a mature industry. It would be easy to dismiss this as an aberration. However, the history of the computer industry contains many striking parallels, suggesting that this experience is not uncommon. It is to this that we next turn.

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Prior to CdS cells, cameras had used photoelectric cells. In addition to their being less energy efficient, photoelectric cells needed to be located externally on the camera body, giving an incident light reading of the amount of light falling on the camera. By contrast, CdS cells facilitated the development of reflexive light meters that calculate the light reflected back though the pentaprism from the scene itself.

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2.2

The computer industry

The history of the computer industry is marked by a number of technological ruptures, each with important consequences for the industrial dynamics of this sector. According to Breshanan and Malerba (1999), one can identify at least four innovation cycles. The first cycle commenced with the introduction of the mainframe. Mainframes served a need for large-scale computation by the military, scientific laboratories, and large firms. IBM emerged as the leading firm in this first cycle, dominating sales in the U.S. and, to a large extent, sales in Europe and Japan as well. European and Japanese mainframe producers were able to survive thanks to protected domestic markets. For example, ICL enjoyed ‘first choice’ status for all purchasing orders drawn up by public sector institutions and universities in the UK. The mainframe cycle saw a number of important innovations, such as the replacement of vacuum tubes by transistors, and (possibly more important) the advent of modularity following the introduction of IBM’s 360 model in the late 1960s (Baldwin and Clark, 2000). Interestingly, while many technical changes have occurred in subsequent innovation cycles, the concept of modular system architectures has remained. The second innovation cycle was driven by the development of the integrated circuit, an invention accredited to Texas Instruments (Sahal, 1985). The advent of the integrated circuit increased the computing power of mainframes enormously. At the same time, it enabled designers to the build smaller and cheaper ‘minicomputers’. These were aimed at users (mainly firms) with less intensive computing needs. The second innovation cycle saw a notable increase in the number of new market entrants. The most notable of these was DEC, who introduced the highly innovative and successful PDP-8 in 1965. DEC became the premier mini producer in this new market niche. IBM, meanwhile, continued to exploit and extend its successful 360 technology in the mainframe niche throughout the 1970s, and also entered the minicomputer niche. However, it was unable to secure the same level of dominance in this new niche (Malerba et al., 1999). European and Japanese firms continued to lag behind their more innovative U.S. counterparts, and largely continued to operate in protected national markets. The third innovation cycle was associated by the development of the microprocessor in the early 1970s. The huge gains in miniaturisation and computing power meant even smaller and cheaper computers could be built. The new technology was appropriated within a new conceptual paradigm, the individual or ‘personal’ computer. This new paradigm quickly displaced the old paradigm of centralised computing systems. The old mainframe and minis niches disappeared and were replaced by the ubiquitous PC in the early 1980s. This third cycle of innovation saw the rise of another set of new start-up companies, such as Apple, Commodore, and Sinclair. However, it was the introduction of the IBM PC – directly aimed at office managers – that marked the crucial watershed in

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the industry. Interestingly, the IBM PC largely comprised an open (i.e. non-proprietary) set of standards. The key exception was the BIOS. However, once other firms had managed to develop an alterative, they were free to enter the market. As a consequence, IBM was unable to achieve a dominant long-term position within the market. Indeed, it is more generally true that the old technology mainframe and minicomputer producers failed to become establish themselves as major players in the PC era. The combination of modularity and common standards opened the way for specialist software and hardware producers (most notably of course, Microsoft and Intel) to become dominant players within the industry. Further, the stabilisation of the industry around this open design configuration enabled a new set of market entrants to establish themselves. Many of these are companies specialising in ‘clones’: lower priced versions of successive generations of the PC design that are fabricated in low cost countries (typically in Asia). In more recent times, the diffusion of the internet (a network of networks) has marked the start of a fourth innovation cycle in computing. Using powerful servers, a network of PCs can be linked together. In one sense, the concept of distributed processing that underpins the internet marks a partial return to the mainframe concept. However, it would be better to think of this as a new conceptual paradigm in computing that contains some elements of the previous independent and centralised computing paradigms. This has seen the emergence, once again, of new technology start-ups such as Cisco (servers) and AOL (internet service provider). It has not, so far at least, led to a new round of entry and exit amongst PC manufacturers. In this paper, we focus on the PC innovation cycle. In a previous paper, one of the authors identified strong evidence of successive generations of desktop computers following a clear technological trajectory throughout the 1980s and early 1990s (Frenken et al., 1999). Within this trajectory, the standard specification of the desktop PC moved from a 5.25’’ diskette to a 3.5’’ diskette to CDROM, successive generation of chip sets from 808x to 286 and 386 to Pentium, and monitor technology changed from monochrome to colour tube to flat panel screens. There was a notable and important exception to this, however - the advent of the portable computer. As with the 126 camera, the portable computer represented a major conceptual breakthrough and was targeted at a particular group of users. In the case of the portable computer, the key initial target group was salesmen. The economic benefits of portability to this group was sufficient to offset the initial high price of portables. For the first time, they could carry spreadsheets, complete standardised electronic orders and collect or log other information which could be readily used to update company information upon their return to the office. As with the 126 camera, the success of this design configuration was such that it quickly developed into a distinct market niche.

In order to integrate all the elements of a computer within a comprehensive, small and light-weight structure, designers needed to completely rethink key elements of the screen,

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keyboard and mouse while simultaneously incorporating standard desktop features (such as hard disks, disk drives, and operating systems) to ensure compatibility with established PC formats. In other words, the designers had to engage in both ‘architectural’ and radical ‘component’ innovation. Some components used in desktops could be easily accommodated in the portable architecture, such as the QWERTY keyboard, processor chips, and disk drives. For other components, however, new technologies needed to be developed. Perhaps the most obvious was the use of liquid crystal display (LCD) screens. At the outset, the complexity of the LCD technology was such that colour versions (by now a standard feature in desktops) were prohibitively expensive, forcing producers to revert back to monochrome screens. Further, the need to integrate the screen, keyboard and mouse into one physical product meant the design was less modular than the desktop design. As in previous innovation cycles, this radical innovation provided a new opportunity for new market entrants. In this case, innovative technology start-ups such as Compaq and Toshiba, and companies from other markets (notably Japanese electronics companies such as Canon and Sharp) were able to establish a significant position within this new market niche. According to the Henderson-Clark (1990) definition of radical innovation, the portable computer cannot be viewed as an incremental design innovation but constitutes a radical innovation in its own right because its development involved both architectural and modular innovations. The same conclusion is reached if one employs the Dosi (1982) definition of radical innovation: portable trajectory represents a distinct bifurcation from the desktop trajectory, each being characterised by a different set of fundamental design trade-offs. Where the fundamental trade-off in desktops is between higher computing speed/memory and price, the fundamental trade-off in portables is between weight and price. The camera and computer industries thus raise important phenomenological and theoretical questions, and challenge the conventional explanation of innovation life cycles. Both industries are mature, and both have experienced bifurcations into multiple market niches as new innovation cycles have taken place. Further, the development of these radical design innovations were championed by new market entrants, notably by Japanese companies. Through radical product innovation these new entrants were able to overcome the first mover advantages enjoyed by dominant US (in the case of computers) and German (in the case of cameras) producers. Indeed, some of these new Japanese entrants were so successful that they became the new dominant players in the industry. Both histories highlight the importance of heterogeneous consumer preferences and design complementarities as key explanatory factors. The success of radical camera and computer designs lay in their ability to cater for the needs and preferences of particular user groups that were hitherto poorly served by the old technology designs. The success of Japanese companies in exploiting these opportunites to enter mature industries also poses important questions for received wisdom on the geographical dynamics of the industry life cycle. For example, in Vernon’s classic 1966 paper, which drew upon the contemporary experience of the car industry during the late 1950s and early 1960s, it is assumed that innovation occurs in the developed countries.

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Subsequently, as the industry matured, large U.S. and European firms started to relocate production around the globe in order to develop local markets and to tap into cheaper labour costs. There appears to be no opportunity for firms in newly industrialising countries (NICs), such as Japan, to enter into these industries. A similar message is derived from Krugman’s 1979 North-South model. Here it is similarly assumed that the comparative advantage of firms in the developed economies lies in their capacity for innovation, while the comparative advantage of NIC firms solely lies in lower labour costs. The histories of the camera and computer industries clearly expose the limitations of such models, as indeed does the more recent post-history of the car industry! The fact that these new designs marked distinct conceptual breaks with past designs, particularly notable in the case of 126 cameras and portable computers, helps explain why new rounds of market entry and shake-out occurred. These new concepts of what is possible in camera design and computer design - indeed what a camera or a computer ‘is’ and ‘can be’ – leads to a formulation of a new paradigm in which there is a distinct and new architecture as well as the development of new components. As Henderson and Clark (1990) have observed, architectural innovations frequently pose problems for old technology firms because it can render existing competences and knowledge in assembly obsolete. New architectures restructure the interaction between components, necessitating important changes in the assembly process, skills, and information processing procedures in general. In addition, new designs typically offer functionalities not present in the old technology designs and, as in these case studies, are being sold to new constituent groups of users. Hence, marketing and sales knowledge and expertise appropriate for the old technology products and carefully built up over time by the dominant incumbent, may no longer apply or be appropriate. Important barriers to market entry are therefore removed. In addition, and to develop Klepper’s (1996) thesis, competences in R&D previously enjoyed by old technology firms (themselves significant barriers to new firm entry) may also to some extent become redundant following the introduction of a radically new technology product. Whether the established incumbents or new entrants become the dominant players will depend on which are able to successfully innovate and build new competences in production, R&D, marketing, distribution, and sales. In order to test for the existence of distinct market niches we shall test whether distinct sets of hedonic process exist for the bundles of characteristics offered in the different product classes, and also for whether distinct sets of dominant producers (capably of earning brand equity) are present in these niches. To do this we shall use hedonic price analysis, which will be discussed in the next section and the results reported in section 5. It will be interesting to qualitatively inspect the regressions to ascertain, if they exist, where the differences lie in terms of particular characteristics, and whether the findings support the hypothesis that new entrants are capable of becoming dominant players and earning brand equity.

3.

Empirical testing using hedonic price analysis

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A number of hedonic price analyses have been carried out on personal computers in the past (e.g. Nelson et al., 1994; Berndt et al., 1995; Stavins, 1995; Baker, 1997; Bresnahan et al., 1997; Berndt et al., 2000)3. However, these previous studies were concerned with estimating the extent of technological progress, as expressed by the fall in prices over time, for a given set of characteristics (or the rise in the values of characteristics for a given price). They do not address, as we do here, the very different question of identifying multiple niches within an industry. Nor did they consider the effect of technological change and radical innovation on the fate of dominant producers (brands). A systematic investigation into the existence of multiple market niches, containing user groups with distinct preference sets, is possible using Lancaster’s characteristics approach (1971, 1991). Lancaster observed that “the good, per se, does not give utility to the consumer; it possesses characteristics, and these characteristics give rise to utility” (Lancaster, 1991, p.13). Hence consumers are not interested in technology for itself but in the stream of services (‘service characteristics’) that the technology delivers. Furthermore, the evolution of a product can be modelled by examining the evolution of the key service characteristics it offers consumers. If distinct sets of consumer groups are present in the market, then, ceteris paribus, products with quantitatively distinct sets of service characteristics will develop as firms seek to gain competitive advantage through product differentiation (Windrum and Birchenhall, 1998). Implicitly, a link is made in the Lancaster approach between the various technical components of a design and a set of associated service characteristics. Let the product pi be described by a vector of x i attributes, where i = 1, …, n. Next, we can simplify by assuming that each attribute x is independently related to one modular component c of the design, such that x i = c i. Given independence between service characteristics, improvement in the quality of a particular component will improve the performance of its associated service characteristic, raising the overall performance of the product. Alternatively, overall performance can be raised through the addition of a new module and associated attribute that is valued by a particular group of users. Whether a particular product innovation enhances the competitive advantage of the innovating firm depends on two factors. First, the cost of the innovation and the resultant change in the price charged for the product and, second, consumer preferences. The first highlights the importance of complementarities between different aspects of a particular technical design, and the potential for different complementarities to be present in alternative design configurations (e.g. 126 and SLR camera designs). In addition, engineers working with alternative design configurations may be presented with very different design constraints, which affect the cost – and, hence, price charged – for a particular product feature. For example, key constraints in portable designs are size and weight. Portable engineers are therefore very concerned about the size and weight of the different components that make up a portable in a way which engineers working with desktops are not. The shadow prices estimated in hedonic regressions will in part reflect these alternative technical constraints. As noted in section 2, the implications of alternative design architectures on the cost and direction of innovation have been discussed by Henderson and Clark (1990), Anderson and Tushman (1990), and Dosi (1982). Far less discussed is the extent to which shadow prices reflect the different 3

Detailed surveys can be found in Triplett (1989) for studies covering the 1970s and 1980s, and in Landefeld and Grimm (2000) for the whole period.

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valuations of alternative user groups on a particular service characteristic. As discussed in section 2, the success of radical, new camera and computer designs lay in their ability to better cater for the needs and preferences of very different groups of users. As Saviotti has observed, hedonic prices can, ceteris paribus, “be considered an approximation of users’ judgement of the relative value of the various characteristics offered by a product” (Saviotti, 1985, p.312). In addition to product characteristics, we test whether different brand equity exists in the alternative market niches. The willingness of consumers to pay higher prices for particular manufacturers’ marques is an important indicator of the ability of new entrants to establish good reputations for quality in service delivery and support (Berndt and Rappaport, 2001). Research into brand equity, prompted by the work of Aaker (1991, 1996) and Keller (1993, 1998), has also suggested that consumers may be willing to pay for a premium for brand names themselves (e.g. Park and Srinivasan, 1994; Ragaswami et al., 1993). In order to test the existence of distinct market niches exist within the camera and computer industries, we first estimate a statistical model that includes all product types in the market, i.e. regressions on all SLR and 126 cameras, and all desktops and portables. The estimated structure of this ‘combined’ model can then, using the Chow test for parameter stability, be compared with the estimated structures of separate statistical models for each product type, i.e. on separate regressions estimated for SLRs, 126s, desktops, and portables. If there is no statistical difference between the combined and the separate estimated models, e.g. ModelSLR+126 = ModelSLR + Model126, then we accept the null hypothesis that the market does not contain distinct niches. If, however, there is a statistical difference between the combined and the separate estimated models, then we reject the null hypothesis and accept that alternative hypothesis that distinct niches exist, e.g. ModelSLR+126 ≠ ModelSLR + Model126.

4.

Camera and computer data sets

The camera data set is drawn from issues of the UK ‘Amateur Photographer’. This weekly publication was first published in 1884. During the period under consideration, the magazine published an annual guide to still cameras. This listed all the products available on the UK market and included both prices and technical product specifications. This single source thus provides a data set that is both consistent and complete for the period 1965 to 1974. The data set contains information on five product characteristics: the range of shutter speeds offered (SS), a dummy variable indicating whether the shutter is mechanically or electronically controlled (M/E), the speed of the standard lens sold with the camera (LS), a dummy variable for whether interchangeable lenses are an option (IL), and a dummy variable indicating whether the camera body has a built-in metering system (M ). Information on the range of shutter speeds (SS) offered in the design has been converted into a scale in order to capture the flexibility offered to the user. Each doubling (halving) of shutter speed is equivalent to one stop. For example, a range of shutter speeds from 1/30 sec. to 1/500 sec. represents 4 stops. In order to obtain comparability between the

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speed of the standard lens supplied with the camera (LS), a log scale is used with a maximum value of 8 accorded to the fastest (theoretically) conceivable lens4 having an open aperture of f1 while the lowest value of 1 is accorded to an open aperture of f22. In addition to these product characteristics, a series of dummy variables are used to test for brand equity. Nine brand names are tested: Agfa, Canon, Kodak, Leica, Minolta, Nikon, Pentax, Rollei, and Zeiss. The computer data set is drawn from issues of the UK magazine ‘WhatPC?’ over the period 1992 to 1997. This magazine provided a monthly comprehensive listing of ‘IBM compatible’ PCs. The magazine also produced an annual overview of all currently avaiable models with detailed specifications of model features and recommended retail prices. Thus we are, once again, able to draw a data set from a single source that is both consistent and complete. The computer industry is different to the camera industry in two notable respects. First, there is a far greater number of competing manufacturers in the computer industry. Second, the computer industry is characterised by a large number of companies that specialise in cheap ‘clones’ that are typically sourced in low cost countries in the Far East. Indeed, of the 3364 desktop models listed in the data set, some 2525 (75%) are clones. Of the 1026 laptops in the data set, 668 (65%) are clones. By contrast, clones are rare in the camera industry – the most famous being the Soviet and East German copies of Leica viewfinder and twin reflex cameras in the period considered in this paper. We will test for the following computer brands: Canon, DEC, Epson, Fujitsu, ICL, NCR, Olivetti, Packard-Bell, Panasonic, Sharp, Siemens, Sun, Compaq, Dell, HP, IBM, NEC, Toshiba, and Zenith. The computer data set also contains a greater number of product characteristics. These include a dummy variable indicating whether the computer is a portable or a desktop machine (PORT), dummy variables for whether a monitor is included in the price (MON), and if the monitor is colour or monochrome (COL). Data on the speed of the CPU processor (LOGMHZ), RAM (and LOGMEM), the maximum capacity that can be achieved through upgrading (LOGMEMMAX), the size of the hard disk and the maximum size of hard disk possible through upgrading (LOGHDSIZ and LOGHDMAX) are translated into logs. Finally, a series of dummy variables are used to distinguish between the disk formats F5.25”, F3.5”, and CDROM, and dummies are used for RS232, mouse and game interface ports (INTRS232, INTMOUSE, INTGAME). Unfortunately the magazine does not provide detailed data on weight for different portables. Data on the weight of desktops is not provided either. This is less surprising, given that weight was not important for desktop issuers.

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An f1 lens is an ideal lens with no measurable optical distortion. The most accurate lens commercially available during the period 1965-1974 had an open aperture of f1.2.

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5.

Results

5.1

Chow tests for parameter stability

Setting up the null hypothesis (H0) that the sample does not contain two distinct subsamples, we apply the Chow test for parameter stability by estimating separate statistical models for SLR and 126 cameras, and a model for all cameras, and take the residual sum of squares for each of the estimated three models. The test statistic has an F distribution with (k, n1 + n2 – 2k) d.f. We test this using the most general estimated model for each of the models. These models can be found in section A1 of the Appendix. The estimated F statistic = 37.438 with a critical F0.01: 15, 1050 = 1.67. Therefore we reject H0 at the 0.01 level, and accept H1 that the data sample contains two sub-samples (SLR and 126 designs) with distinct sets of product characteristics and brands. In the same fashion, we test for distinct sub-samples in the computer data, i.e. desktops and portables by setting up the null hypothesis (H0) that the sample does not contain two distinct sub-samples. The three estimated regression models can be found in the section A2 of the Appendix. The estimated F statistic = 10.907 with a critical F0.01: 33, 4390 = 1.46. Therefore we reject H0 at the 0.01 level, and accept H1 that the data sample contains two sub-samples (desktop and portable designs) with distinct sets of product characteristics and brands.

5.2

Comparing the estimated regression models

Inspecting the estimated models for SLR and 126 cameras, and desktops and portables, yields a number of interesting observations. With regards to the estimated coefficients in the SLR and 126 camera models, we see that the estimates for certain key characteristics differ significantly. Perhaps the most notable is the estimated coefficients for AE. Automatic exposure systems were offered in both designs but the estimated coefficient for A E is not statistically significant in the SLR model, suggesting that ‘serious hobbyists’ did not positively value this attribute and, hence, were unwilling to pay a positive price for it. By contrast, a statistically significant coefficient for AE is estimated in the 126 model. In addition, the coefficient estimates of the characteristics SS and LS in differ notably between the SLR and 126 models. The estimated coefficients for product characteristics in the desktop and laptop models do not differ much. The one difference of note is between the alternative disk drive formats. Each is statistically significant in the desktop regression, with negative estimated coefficient for 5.25” disk drives, and positive estimated coefficients for 3.5” and CDRom drives. Only two options, 3.5” and CDRom drives, were offered in the portables sample, and neither estimated coefficient is statistically significant. Perhaps the most surprising finding is that CPU speed (LOGMHZ) in not found to be statistically significant in either regression model. It may be that purchasers paid more attention to the names of different generations of chips than to absolute speed. It may be forth pursuing this in future research. In part, of course, the lack of difference is due to a key omitted variable that 13

distinguishes laptops from desktops – weight – not being included in the dataset. The other key distinction discussed in the paper is the concept of ‘portability’ itself. Where this is included as a dummy variable in the pooled statistical model for all computers, this is estimated to be a statistically significant variable. Yet, since this is a constant for each category of computer, it does not appear in the separate statistically regression models. The estimated models offer some interesting insights into market leadership. First, brands are an explanatory factor of price in each of the estimated camera and computer models. Second, and what is particularly interesting, is that brands equity differs between niches. This is the case in both the different camera and computer industries. In the SLR market, two of the old established German marques of Leica and Zeiss, famous for the high quality of their lenses, continue to attract a premium. The extent to which the leading Japanese companies had caught up with these marques is indicated by the fact that four of the ‘big five’ Japanese marques - Nikon, Canon, Pentax, and Minolta - are able to charge a premium in the SLR market. In the 126 market, the Agfa and Minolta marques are estimated to be statistically significant. As discussed in section 2, Pentax and Minolta were able to move into the professional (medium format) market niche once they had established themselves in the SLR market. The estimated regression model also indicates that Minolta was also able to subsequently establish itself as a brand leader in the 126 market as well. The picture in the computer industry is more mixed. Certainly the Japanese penetration of the portable market is reflected in that some four out of the nine marques estimated to be statistically significant are Japanese (NEC, Panasonic, Sharp, Toshiba), of which only NEC had experience in previous innovation cycles in the computer industry. In addition, Compaq, the innovative US start-up, is also estimated to earn brand equity. Just three of the old, established US marques (HP, IBM and Zenith) attract a premium in the portable market while just one European company, Olivetti, attract a premium in this particular market niche (although it should be noted that this is at the limit of the 5% level of statistical significance). The old technology marques appear to fair much better in the desktop niche. Ten of the thirteen marques that are statistically significant are old technology firms. Of these, four are US (DEC, HP, IBM and Zenith), four are European (ICL, NCR, Olivetti, and Siemens), and two are Japanese (Fujitsu and NEC). The three firms that entered the industry in the PC innovation cycle, and who are estimated as earning brand equity in the period under consideration, are Compaq and Sun (from the U.S.), and Epson (from Japan)5. Compaq is particularly notable in that this company first started as a laptop company and was able to exploit its position within this niche to move into the desktop niche, where it also earns brand equity. This would seem to suggest that the advent of the portable computer actually provided more opportunities for new entrants than the advent of the desktop PC some twenty years earlier.

6.

Conclusions

The case studies raise important questions regarding the conventional phenomenological account of the innovation life cycle. It appears that multiple cycles of innovation, each prompted by the introduction of radically new designs and each consistent with Klepper’s 5

Epson, a subsidiary of Seiko, started business in 1982.

14

‘stylised facts’, can appear over the course of an industry life cycle. Moreover, new innovation cycles can result in bifurcations of the industry into distinct market niches. With the emergence of these new niches, new entrants have the possibility of establishing themselves as the leading players. As a consequence, new innovation cycles can results in displacement of old, previously dominant, technology producers by new technology firms that may be located in different geographical regions. We conducted hedonic price on datasets of product characteristics and brands in order to test the thesis that bifurcations in the camera and computer markets resulted in distinct market niches. Hedonic price analysis particularly effective for testing brand equity. Interpreting this premium as a reward for above-average quality and service, it can be used as an indicator of firm competence (in a broad sense). The theoretical foundations being marginal analysis, shadow prices reflect both marginal costs and marginal benefits. For this reason, one cannot ascribe the brand success of a firm in a particular niche to its market competence alone, or technical competence alone. It is probably safe to say that, in both industries, supply and demand factors played a role. This still leaves open the question of whether supply factors or demand factors were predominant in each sector. We suspect, from the technologies’ histories, that demand side factors played a more important role in cameras, while supply side factors have been of greater importance in the computer industry. The history of the camera industry draws attention to two factors that require attention in future theoretical work. The first is the existence of heterogeneous consumer preferences. The amateur camera market is characterised by two distinct user groups. In the 1940s and early 1950s, both groups had bought slightly differentiated price/quality versions of the viewfinder camera, conforming to the conventional life cycle account. However, this was an unstable equilibrium, exposed by the subsequent introduction of designs that were better suited the needs and preferences of these distinct user groups. At this point, the market bifurcated into distinct product niches, a feature that remains to this day. In the early history of the laptop computer, the role of a particular user group, salesmen in private sector firms, was particularly important. Without these technological champions the technology could not have developed. Yet the portable was subsequently adopted by the same user groups that adopted desktops computers and today are seen as complementary technology products rather than substitutes. The distinct design trajectory for laptops that co-exist alongside the older desktop trajectory is maintained by the desire to provide functionalities that are comparable to the desktop but within a smaller and lighter design. The physical constraints laid down by the portable architecture create a whole new set of trade-offs for designers, which were difficult to solve without raising costs too much (e.g. LCD screens). Indeed, the new entrants that successfully entered the computer industry by specialising in portables, were often firms with considerable experience in related technologies. This suggests that generic design competencies have played an important role in successfully developing portable computers and have been a key explanatory factor behind the market shake-out that occurred following the introduction of the laptop. Finally, the case studies highlight the possibility of changing geographies of production that follow in the wake of these innovation cycles. In both industries, the emergence of a new niche allowed Japanese firms to enter the market relatively quickly while causing difficulties for established European and U.S. firms. These Japanese companies did not 15

succeed because they offered cheaper versions of the dominant design, but because they were innovators who established reputations for quality design and manufacture. Moreover, once a new entrant has established a reputation in the new niche, it can leverage this reputation to enter older, established market niches. This was achieved by a number of Japanese producers in the camera industry, and also by the U.S. firm Compaq in the computer industry. To conclude, the findings of the paper suggest that future theoretical and empirical research on innovation life cycles needs to consider the role of heterogeneous consumer preferences and design complementarities in the development of new cycles of innovation in mature industries. Further, the geographical implications of these new waves have important implications for changing fortunes of firms in different national economies. Japanese companies were not only successful in entering the camera and computer markets but also other mature industries such as motorbikes, automobiles and electrical goods from the 1960s onwards. A greater appreciation of the success of these companies will assist in strengthening our understanding of industry dynamics and the changing geography of production within mature industries. Indeed, the dynamics discussed contrast strongly with those discussed by earlier writers, such as Vernon (1966) and Krugman (1979), on the changing geography of production over industry life cycles. This suggests a need for future research to critically reappraise the dynamics of industry evolution, both at the theoretical and the empirical level

16

APPENDIX A1. Estimated camera models Model 1a: Combined model of SLR and 126 cameras Coefficients Unstandardised Coefficients B Std. Error (Constant) .315 .042 IL .354 .032 SS 3.439E-02 .003 M .144 .016 LS .121 .009 M/E .146 .021 AE 7.509E-03 .019 LEICA .372 .055 ROLLEI .103 .126 ZEISS 4.086E-02 .056 NIKON .223 .032 CANON .140 .027 PENTAX 8.657E-02 .041 MINOLTA .146 .030 AGFA 9.880E-02 .046 KODAK -2.173E-02 .034 Dependent Variable: LOGPRINF Independent Variables

Standardised t-ratio p-value Coefficients Beta .000 7.535 .286 10.924 .000 .000 .250 10.950 .000 .126 8.977 .000 .334 14.089 .000 .096 6.955 .005 .403 .687 .000 .085 6.708 .010 .821 .412 .009 .736 .462 .000 .092 7.056 .000 .068 5.161 .027 2.109 .035 .000 .066 4.867 .029 2.131 .033 -.009 -.638 .524

Model Summary R

R Square

Adjusted R Square

.917

.842

Sum of Squares 251.564 47.292 298.857

Regression Residual Total

Durbin-Watson

.839

Std. Error of the Estimate .2174

df

Mean Square

F

15 1001 1016

16.771 4.725E-02

354.978

17

1.565

Model 1b: Model of SLR cameras Coefficients Independent Variables (Constant) SS M LS M/E AE LEICA ROLLEI

Unstandardised Coefficients B Std. Error .939 .110 6.286E-02 .003 .143 .016 4.062E-02 .016 .106 .031 -7.359E-03 .032 .446 .055 .159 .099

ZEISS .335 NIKON .233 CANON .156 PENTAX 8.289E-02 MINOLTA .102 Dependent Variable: LOGPRINF

.031 .025 .023 .032 .031

Standardised t-ratio p-value Coefficients Beta .000 8.527 .000 .494 21.119 .000 .219 9.060 .061 2.531 .012 .132 3.431 .001 -.008 -.231 .818 .000 .178 8.089 .035 1.600 .110 .243 .210 .157 .057 .094

10.888 9.275 6.741 2.554 3.343

.000 .000 .000 .011 .001

Note that, since interchangeable lenses (IL) is a dummy variable and all SLRs in the data set have this option, the variable is omitted from the estimated regression. Further, Agfa and Kodak did not produce SLR designs during the estimated period and so these variables are also omitted from the analysis. Model Summary R

R Square

Adjusted R Square

.806

.649

Sum of Squares 40.061 21.671 61.732

Regression Residual Total

Durbin-Watson

.643

Std. Error of the Estimate .1711

Df

Mean Square

F

12 740 752

3.338 2.928E-02

113.998

18

1.173

Model 1c: Model of 126 cameras Coefficients Unstandardised Coefficients B Std. Error (Constant) .347 .042 SS 2.150E-02 .006 M .168 .032 LS .115 .009 M/E .166 .062 AE .155 .034 CANON -5.397E-02 .081 MINOLTA .111 .075 AGFA 8.602E-02 .043 KODAK -2.146E-02 .030 Dependent Variable: LOGPRINF Independent Variables

Standardised t-ratio p-value Coefficients Beta .000 8.256 .155 3.338 .001 .000 .227 5.195 .000 .486 12.893 .126 2.694 .008 .191 4.538 .000 -.024 -.670 .503 .052 1.491 .137 .069 2.022 .044 -.025 -.717 .474

Note that, since interchangeable lenses (IL) is a dummy variable no 126s in the data set have this option, the variable is omitted from the estimated regression. Further, Leica, Rollei, Zeiss, Nikon, Pentax did not produce 126 designs during the estimated period and so these variables are also omitted from the analysis.

Model Summary R

R Square

Adjusted R Square

.860

.740

Sum of Squares 25.947 9.115 35.062

Regression Residual Total

Durbin-Watson

.731

Std. Error of the Estimate .1894

df

Mean Square

F

9 254 263

2.883 3.589E-02

80.335

19

1.866

A2. Estimated computer models Model 2a: Combined model of desktop and portable computers Coefficients Independent Variables

Unstandardised Coefficients B Std. Error (Constant) 1.730 .066 CANON 7.280E-02 .066 DEC .126 .035 EPSON .312 .066 FUJITSU .321 .083 ICL .115 .028 NCR .232 .035 OLIVETTI 9.123E-02 .019 PACKARDBELL 4.935E-02 .042 PANASONIC .274 .047 SHARP .262 .066 SIEMENS .156 .032 SUN .277 .093 COMPAQ .146 .018 DELL -1.421E-02 .022 HP .216 .021 IBM .132 .018 NEC .154 .031 TOSHIBA .207 .027 ZENITH 9.783E-02 .023 F5.25” .110 .010 F3.5” -5.681E-02 .017 CDROM -2.743E-02 .012 PORT 6.304E-02 .009 MON 8.622E-02 .028 COL -6.743E-02 .008 LOGMHZ 8.588E-03 .021 LOGMEM .388 .016 LOGMEMMAX 2.322E-02 .008 LOGHDSIZE -.115 .014 LOGHDMAX 2.322E-02 .011 INTRS232 1.922E-02 .042 INTMOUSE 5.086E-02 .007 INTGAME -9.667E-02 .008 Dependent Variable: LOGPRINF

Standardised t-ratio p-value Coefficients Beta 26.224 .000 .013 1.098 .272 .043 3.562 .000 .057 4.719 .000 .046 3.849 .000 .051 4.153 .000 .081 6.661 .000 .058 4.732 .000 .014 1.166 .244 .071 5.824 .000 .048 3.963 .000 .059 4.875 .000 .036 2.967 .003 .100 8.149 .000 -.008 -.641 .521 .125 10.311 .000 .090 7.363 .000 .061 5.047 .000 .096 7.774 .000 .052 4.247 .000 .157 10.718 .000 -.044 -3.302 .001 -.035 -2.377 .018 .114 6.748 .000 .038 3.134 .002 -.135 -8.346 .000 .010 .411 .681 .552 23.708 .000 .051 2.854 .004 -.246 -8.361 .000 .043 2.073 .038 .006 .462 .644 .109 7.408 .000 -.166 -12.562 .000

Model Summary R

R Square

Adjusted R Square

.612

.374 Sum of Squares 89.806 150.123 239.929

Regression Residual Total

Durbin-Watson

.370

Std. Error of the Estimate .1856438

df

Mean Square

F

33 4356 4389

2.721 .034

78.964

20

1.196

Model 2b: Model of desktop computers Coefficients Unstandardised Coefficients B Std. Error (Constant) 1.705 .157 DEC .149 .040 EPSON .304 .066 FUJITSU .345 .084 ICL 9.990E-02 .031 NCR .231 .038 OLIVETTI 9.593E-02 .024 PACKARDBELL 5.248E-02 .043 SIEMENS .203 .038 SUN .266 .094 COMPAQ .127 .022 DELL 9.366E-04 .025 HP .234 .023 IBM 9.090E-02 .022 NEC .149 .040 ZENITH .104 .029 F5.25” -6.458E-02 .011 F3.5” 8.989E-02 .019 CDROM 2.437E-02 .012 MON .145 .132 COL .150 .010 LOGMHZ -3.233E-02 .024 LOGMEM .442 .018 LOGMEMMAX 2.331E-02 .009 LOGHDSIZE -.109 .015 LOGHDMAX 1.063E-02 .012 INTRS232 -2.499E-02 .071 INTMOUSE 5.383E-02 .007 INTGAME -8.687E-02 .008 Dependent Variable: LOGPRINF Independent Variables

Standardised t-ratio p-value Coefficients Beta 10.847 .000 .051 3.719 .000 .063 4.586 .000 .056 4.120 .000 .045 3.254 .001 .084 6.133 .000 .056 4.021 .000 .017 1.235 .217 .074 5.383 .000 .039 2.835 .005 .081 5.767 .000 .001 .037 .970 .140 10.113 .000 .058 4.167 .000 .051 3.714 .000 .050 3.617 .000 -.102 -5.939 .000 .071 4.643 .000 .034 1.968 .049 .015 1.095 .274 .278 15.636 .000 -.040 -1.371 .171 .666 24.713 .000 .052 2.692 .007 -.242 -7.393 .000 .020 .890 .374 -.005 -.352 .725 .109 7.208 .000 -.163 -11.151 .000

Note that, since PORTABLE is a dummy variable, it is omitted from the estimated regression. Additionally, Canon, Panasonic, Sharp and Toshiba did not produce desktop PCs during the estimated period and these variables are also omitted from the analysis. Model Summary R

R Square

Adjusted R Square

.617

.381 Sum of Squares 71.021 115.471 186.492

Regression Residual Total

Durbin-Watson

.376

Std. Error of the Estimate .1860751

df

Mean Square

F

28 3335 3363

2.536 .035

73.258

Model 2c: Model of portable computers 21

1.175

Coefficients Unstandardised Coefficients B Std. Error (Constant) 1.815 .115 CANON .103 .055 DEC 7.974E-02 .063 ICL 2.829E-02 .057 NCR .139 .077 OLIVETTI 5.365E-02 .027 PANASONIC .218 .041 SHARP .187 .055 SIEMENS 4.405E-02 .052 COMPAQ .114 .026 DELL -1.189E-02 .039 HP .104 .042 IBM .181 .026 NEC .134 .039 TOSHIBA .178 .022 ZENITH 9.105E-02 .032 F3.5” 6.173E-02 .032 CDROM 5.228E-02 .035 MON 6.846E-02 .023 COL .118 .013 LOGMHZ 3.989E-04 .040 LOGMEM .290 .037 LOGMEMMAX 9.019E-02 .022 LOGHDSIZE -.169 .032 LOGHDMAX 5.887E-02 .029 INTRS232 -1.017E-02 .046 INTMOUSE -8.003E-03 .017 Dependent Variable: LOGPRINF Independent Variables

Standardised t-ratio p-value Coefficients Beta 15.761 .000 .046 1.851 .064 .031 1.269 .205 .013 .498 .619 .044 1.814 .070 .048 1.961 .050 .137 5.339 .000 .083 3.428 .001 .022 .855 .393 .109 4.441 .000 -.007 -.307 .759 .061 2.474 .014 .169 6.916 .000 .084 3.474 .001 .198 7.938 .000 .070 2.857 .004 .049 1.909 .057 .040 1.482 .139 .072 2.949 .003 .296 8.812 .000 .001 .010 .992 .357 7.780 .000 .165 4.163 .000 -.358 -5.236 .000 .111 2.045 .041 -.006 -.221 .825 -.013 -.481 .630

Once again, PORTABLE is a dummy variable that is omitted from the estimated regression. Other omitted variables are EPSON, FUJITSU, PACKARDBELL, and SUN because these firms did not produce portables during the estimated period. F5.25” and INTGAME are omitted because none of the models in the sample had these features. Model Summary R

R Square

Adjusted R Square

.651

.423 Sum of Squares 16.948 23.098 40.046

Regression Residual Total

Durbin-Watson

.408

Std. Error of the Estimate .1520574

df

Mean Square

F

26 999 1025

.652 .023

28.192

22

1.250

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