Vertical Integration and Dis-integration of ComputerFirms: A History Friendly Model of the Co-evolutionof the Computer and Semiconductor Industries

In this paper we present a history-friendly model of the changing vertical scope of computerfirms during the evolution of the computer and semiconductor industries. The model is“history friendly”, in that it attempts at replicating some basic, stylized qualitative features ofthe evolution of vertical integration on the basis of the causal mechanisms and processeswhich we believe can explain the history. The specific question addressed in the model is setin the context of dynamic and uncertain technological and market environments, characterizedby periods of technological revolutions punctuating periods of relative technological stabilityand smooth technical progress. The model illustrates how the patterns of vertical integrationand specialization in the computer industry change as a function of the evolving levels anddistribution of firms’ capabilities over time and how they depend on the co-evolution of theupstream and downstream sectors. Specific conditions in each of these markets – the size ofthe external market, the magnitude of the technological discontinuities, the lock-in effects indemand – exert critical effects and feedbacks on market structure and on the vertical scope offirms as time goes by...