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MON 2:30 PM Parallel Market Dynamics

The session, chaired by Emmanuel Adamides, put together three contributions connected by the authors' interest in applications of system dynamics to modeling of the behavior of businesses in specific market situations.

The presentation Market Development of Airline Companies: A System Dynamics View on Strategic Movements, by Bernhard Kleer, introduced a system dynamics model of the simplest duopoly market with two airline companies operating the same route between two airports. Special attention was paid to the case when a low-cost carrier entered the market served by a full-service incumbent. The presented version of the model consisted of four modules accounting for the airline configuration (flight frequency, tube size, ticket price, service quality, cost structure), airline policy (seat load factor), airline attractiveness (aggregated utility vs. price of service), and service demand (total demand and its distribution between airline companies). The model was calibrated using the data published in connection with predatory pricing of Lufthansa against Germania on the Frankfurt/Main - Berlin/Tegel route. Results for various market scenarios and airline policies were presented and compared to hypotheses commonly adopted in the literature. Among others, it was shown that the latent demand does not necessarily benefit a new company in a market - both the incumbent and a new entrant are able to skim the demand. Pricing turns out to be a decisive factor in setting demand.

The presentation Business Model Analysis: A Multi-Method Approach, by Oliver Grasl, proposed a structured framework for analyzing a firm's business model. Based on a thorough literature review, the author suggested the following definition of the business model concept: "A firm's business model defines how [the firm] creates value for all the actors within its business network and how this value is used to support its business transactions." In order to represent such a comprehensive concept exhibiting at the same time structural, behavioral, and dynamic complexity, the author advocated a multi-model approach, combining system dynamics to seize the dynamic complexity and Unified Modeling Language (UML), a standardized general-purpose modeling language in software engineering, to capture the structural and behavioral relationships. The proposed approach to a business model analysis was illustrated by means of a case study of a professional service firm delivering process management consulting to IT service providers. Multiple views of the firm's business model were shown, including value network, product, business transaction, and value dynamics views. The last view was represented by a system dynamics model, the rest were represented by the appropriate UML diagrams. A closer integration of the UML and system dynamics representations was pointed out as one of challenges left for future work.

The presentation How Price Fluctuations Are Influenced by the Response of Intermediaries to Different Sales Methods, by Hamid Foroughi, analyzed the impact of a car manufacturer's policy of pre-selling cars to customers (Pre-sell) or selling cars to dealers (Wholesale) at a discounted price whenever supply significantly exceeded demand. The modeling team elucidated through a system dynamics model that such a policy in effect created speculative demand from unofficial intermediaries, which both masked the actual customer demand and reduced the price perceived by the customers. In the long run, the actual market prices and the company profit. Due to confidentiality issues, only the core concepts of the model were presented, together with some typical simulations. Not surprisingly in a real-life project like this, the team paid much attention to involving executive management in the process of model building and interpretation. In this respect, the chronic lack of time of top management and resistance of some stakeholders like car dealers were named as major issues. Accordingly, the team pointed out the gradual change of management's attitude to Pre-sell and Wholesale policies as the most significant outcome of the project.

Rudolf Kulhavy

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