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Thinking Small and Long: Service-Dominant Logic & Agent Based Modeling . Robert F. Lusch Lisle & Roslyn Payne Professor of Marketing University of Arizona University of Hawaii March 10, 2006. Small and Long Thinking . S-D Logic & ABM as a Paradigm Shift: From Constructs to Actors.

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Thinking Small and Long:Service-Dominant Logic & Agent Based Modeling

Robert F. Lusch

Lisle & Roslyn Payne Professor of Marketing

University of Arizona

University of Hawaii

March 10, 2006



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S-D Logic & ABM as a Paradigm Shift:From Constructs to Actors

  • Virtually all social science theory models relations between constructs.

  • S-D logic views marketing as interactions between entities and ABM provides the method to model and research these interactions.

  • What emerges from interactions?

    • Macro structures

    • Relations between variables

    • Rules (institutions and norms)

    • Co-creation


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Building Markets from Ground Up

Object

Oriented

Programming


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Object Oriented Programming

  • OOP Integrates Data and Functions.

  • Every digital organism is an object with its own information and functions it uses to operate.

  • Every digital organism has receptors, memory, decision system, and effectors.


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Creation of Digital Life

Object Oriented

Software Program

Environment

Memory Capability

Sensory Capability

Effector Capability

Learning & Decision Capability

Environment



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Decision-Making: From Substantive Rationality to Procedural Rationality

  • Simon (1978) argues the concept of rationality is “economics” main export to other social sciences.

  • In complex environments actors evolve and their actions and anticipations are unknown from each other; the relevant rationality is procedural rationality.

  • These environments are the “permanent and ineradicable scandal of economic theory” (Simon 1976).

  • Mind is the scarce resource; how the actor finds efficient and effective search algorithms is the key.


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Procedural Rationality: How do Individuals Reason & Learn? Rationality

  • Inductive reasoning—ampliative method of reasoning (gap filling)

  • Extinguish rules or actions that are unsuccessful and adopt rules or actions that are successful—market hypotheses

  • Information processing and actions not fine-grained but are fuzzy

  • Memory lingers; little is completely forgotten


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Lack of crisp, well-defined boundaries Rationality

Membership in two or more sets

Imprecise linguistic concepts

Everything a matter of degree

Speed of perception and information processing

Weekend Days

Fuzzy Logic

Saturday

Sunday

Friday


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A Pair of Interesting Observations Rationality

  • What used to work no longer works?

    • Competitive dynamics

    • Competition is a disequilibrating process

  • If it works don’t fool with it.

    • Learning via exploitation

    • Learning via exploration

    • The ambidextrous organization


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Real Competitive Markets Rationality

  • Competition is an evolutionary & disequilibrating process (Schumpeter 1934; Alchian 1950; Nelson & Winter 1982)

  • Competition occurs in uncertain world and competition is a knowledge discovery process (Hayek 1935)

  • Demand and supply are heterogeneous (Chamberlain 1933; Alderson 1957, 1965)

  • Competition involves a struggle for advantage (Clark 1954; Alderson 1957, 1965)

  • History counts (North 1981; Chander 1990)

  • Entities constantly strive to do better (Bain 1954, 1956)

  • Resources are tangible and intangible and imperfectly mobile (Penrose 1959; Lippman & Rumelt 1982).

  • Knowledge is the fundamental source of competitive advantage (Vargo & Lusch 2004).


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Competitive Dynamics: RationalitySimple Rules

  • Sellers must independently decide on price, advertising, product attributes, inventory level.

  • Seller has four fuzzy states (low, moderately low, moderately high, high) for each of four decisions. 44= 256 rules

  • These 256 rules form a “market hypothesis”

  • Ten rule bases characterize 10 market hypotheses each seller uses.

  • Utilization of which market hypothesis to use is based on their fitness.







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The Ambidextrous Organization & Evolutionary Biology Rationality

  • When the environment changes slowly then mechanisms of exploitation that work on variation, selection and retention work well.We learn by communicating and do this primarily by crossover.

  • When there is dramatic shift in the environment or a punctuated equilibria then relying purely on exploitation will not allow the organism to survive. It must explore to innovate or face extinction.


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The Ambidextrous Organization: RationalityModeling Exploitation with Crossover

Moderate Crossover (moderate exploitation) is represented by 50% probability of crossover every 30 periods.

High Crossover (high exploitation) is represented by 100% probability of crossover every 30 periods. In this situation the seller takes advantage of every opportunity to investigate the space for a good solution.


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The Ambidextrous Organization: RationalityModeling Exploration with Mutation

High Mutation (high exploration) is represented by 50% probability of mutation every 30 periods.

Moderate Mutation (moderate exploration) is represented by 25% probability of mutation every 30 periods.

Low Mutation (low exploration) is represented by 5% probability of mutation every 30 periods.




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Market-A: Stable World Rationality

  • Buyer preferences are fixed or unchanging.

  • In this situation we would expect the organization that focuses heavily on exploitation as a learning mechanism and seldom uses exploration to learn to perform best (seller four). On the other hand an organization with high exploration would do poorly (seller one).


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Stable World Rationality


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Market B: Turbulent World Rationality

  • Buyer preferences are randomly changed every 1500 periods (50*crossover frequency).

  • In this situation we would expect ambidextrous organizations to do best. The organizations that both, to a good degree, exploit and explore. This would be sellers 2 or 3. Seller four who hardly ever explores should perform the poorest.


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Turbulent World Rationality


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Profit Payoffs Rationality


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Moderating Effect: RationalityMarket Environment(average profit)



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