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Modelling the Evolution of Business Relationships and Networks as Complex Adaptive Systems Fabian P. Held A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy Discipline of Marketing The University of Sydney Business School Sydney, Australia Submission Date: March 1 2013 Statement of Originality This is to certify that to the best of my knowledge, the content of this thesis is my own work. The thesis has not been submitted for any degree or other purposes. I certify that the intellectual content of this thesis is the product of my own work and the assistance received in preparing this thesis and sources have been acknowledged. Fabian P. Held Abstract This thesis seeks to better understand the development and evolution of busi- ness relationships and networks from a complex systems perspective, using agent- based modelling. The thesis focusses on the early stages of the development of a business network: the transition from autarky to an interdependent yet decen- tralised system of production and consumption, that relies on exchange, special- isation and division of labour. The thesis uses existing research on activities and interactions in business relationships in order to identify social mechanisms that constitute a causal explanation of the self-organisation of an interdependent pro- duction system. These mechanisms are implemented in a computer model of au- tonomous agents, and the implementation is validated through the reproduction of stylised facts from prior laboratory experiments. Subsequent model analysis identifies alternative patterns of emergence and investigates the interacting effects of input parameters that define social and economic aspects of the model. The presented model is modularly expandable, facilitating the introduction of new as- pects regarding the agents’ behaviour, their economic and technological system and their environment, inviting extensions and future research on one unifying platform. To my family Acknowledgements This dissertation concludes one stage of a wonderful journey full of new ex- periences, challenges and surprises. It was a process of discovery, not only about business networks but about research, life, the universe and everything. The journey has been made more interesting and exciting, thanks to my main supervisor Professor Ian Wilkinson to whom I am deeply indebted. I would like to express my warmest gratitude to Ian for his continuous encouragement and whole- hearted support, for leaving me to explore on my own, but persistently pushing and prodding when he saw it was necessary, putting new ideas under my nose for me to discover and for introducing me to an eclectic world I did not know existed. He has been a mentor, a good friend, my academic father. My thesis is part of the ARC discovery project DP0881799, jointly led by Pro- fessors Ian Wilkinson, Robert Marks and Louise Young. In a way, their project description of a few pages determined my day to day life over the past four years. Together they helped me develop my thinking about the complexities of the prob- lem at hand and they helped me identify a suitable course of action that ultimately led to the completion of this thesis. Each of them was always ready to help and support me in their individual fashion, and I am very grateful to have had them as a supervisor team. Also I would like to acknowledge the generous financial support through the ARC project that made this endeavour possible. I consider myself lucky to have had the opportunity to undertake my studies at the School of Marketing at the University of New South Wales, as well as the Discipline of Marketing at the University of Sydney Business School. Both are amongst the finest schools in the country, yet the student experience could not have been more different. I am grateful for the high standard of training that I received at both institutions and their financial support for attending workshops and conferences is very much appreciated. To my colleagues, the staff and fellow students thank you. Also, I am thankful to the three external examiners of this thesis, Professor Frans Prenkert, Professor David C. Earnest and Professor Roger Layton. I know it must take a lot of time and dedication to do a good thesis review, and I am very thankful for their constructive comments and feedback. Lastly, I would like to thank Adam McGowan who gladly volunteered to proofread and help edit the final thesis at the busiest of times. All remaining errors are my own. Sydney, March 2013 Contents 1 Project Overview1 1.1 Markets-as-Networks............................2 1.1.1 Research on Dynamics and Change................7 1.1.2 Research Questions.........................9 1.1.3 Outline of the Thesis........................ 11 2 A Computational Social Science Approach to Marketing Theory 13 2.1 Economic Change.............................. 15 2.2 Analytical Sociology............................ 22 2.3 Models - Understanding Through Analogy................. 29 2.4 Agent-Based Modelling........................... 33 2.5 Complex Systems.............................. 37 3 Mechanisms - A Review 49 3.1 Mechanisms Related to Acting and Specialisation............. 53 3.2 Business Mating Mechanisms....................... 62 3.3 Business Dancing Mechanisms....................... 66 3.4 Mechanisms Interconnecting Relations................... 75 3.5 Environmental Conditions and their Impact................ 81 4 Existing Models and their Implementation of Mechanisms 84 4.1 Models Related to Specialisation and Division of Labour......... 86 4.2 Models Related to Mating......................... 94 4.3 Models Related to Cooperation....................... 98 4.4 Models Related to Exchange........................ 109 4.5 Models Related to Social Relations..................... 115 iv 5 Model Development Process 125 5.1 A Model on Specialisation......................... 125 5.2 Parsimonious Models of Select Mechanisms................ 129 5.3 Models of Realistic Agent Behaviour.................... 139 5.4 Résumé of the Model Development Process................ 152 6 Research about the Evolution of Specialisation 160 6.1 Vernon Smith’s Experiments........................ 163 6.2 Kimbrough’s ABM of the Discovery of Specialisation and Exchange... 174 7 EGS - A Model of the Development of Specialisation and Exchange 185 7.1 Model Description............................. 186 7.1.1 Exploitation or Exploration.................... 194 7.1.2 Searching.............................. 196 7.1.3 Negotiating............................. 198 7.1.4 Producing.............................. 203 7.1.5 Learning about Production Capabilities.............. 205 7.1.6 Learning about Partners...................... 206 7.1.7 Learning about Number of Negotiation Attempts......... 207 7.2 Comparing EGS and KM.......................... 208 7.3 Mechanisms in EGS............................ 210 8 Understanding EGS 218 8.1 Calibrating to CSW............................. 220 8.1.1 Approximate CSW Settings in EGS Framework.......... 221 8.1.2 Describing EGS Outcomes..................... 227 8.1.3 Relations between Input and Output................ 233 8.1.4 Clusters of Similar Model Outcomes................ 249 8.1.5 Discussion of Select Model Aspects................ 257 8.1.6 Comparison of EGS outcomes and CSW results.......... 267 8.2 Extending EGS............................... 275 8.2.1 Varying the Number of Agents................... 275 8.2.2 Varying the Number of Products.................. 285 8.2.3 Increasing Production Heterogeneity................ 294 8.3 Discussion of Findings........................... 300 v 9 Conclusion and Future Research 307 9.1 Limitations and Future Research...................... 309 9.1.1 Research in the Existing Framework................ 310 9.1.2 Research Extending EGS...................... 312 A BusiNET (Business Network Evolution Tool) 317 A.1 ODD (Overview, Design Concepts, and Details).............. 317 A.1.1 Purpose............................... 317 A.1.2 Entities, State Parameters and Scales................ 319 A.1.3 Process Overview and Scheduling................. 320 A.1.4 Design Concepts.......................... 323 A.1.5 Initialization............................ 327 A.1.6 Input Data.............................. 327 A.1.7 Submodels............................. 327 B Reproducing CSW: Further Technical Details 334 References 350 vi List of Tables 3.1 Richardson’s (1972) classification of activities and their coordination 58 3.2 Overview of mechanisms that drive individual specialisation .... 61 3.3 Overview of mechanisms of business mating ............. 66 3.4 Overview of mechanisms of business dancing ............. 74 3.5 Overview of mechanisms of interaction between relationships ... 80 4.1 Classification of learning models, from Brenner(2006) ....... 94 4.2 Prisoner’s dilemma payoff matrix .................... 100 6.1 Average efficiency and specialization by treatment, adapted from Kimbrough (2011). ............................ 182 7.1 Overview of parameters and variables in the Expandably Growing Specialists (EGS) model - Global parameters ............. 192 7.2 Overview of parameters, attributes and functions in the Expandably Growing Specialists (EGS) model - Agent specific model aspects . 193 7.3 Implementation of production and specialisation mechanisms in EGS212 7.4 Implementation of search and mating mechanisms in EGS ..... 213 7.5 Implementation of business dancing mechanisms in EGS ...... 215 7.6 Implementation of interaction mechanisms