Handbook on the Economics and Theory of the Firm
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Handbook on the Economics and Theory of the Firm

Edited by Michael Dietrich and Jackie Krafft

This unique Handbook explores both the economics of the firm and the theory of the firm, two areas which are traditionally treated separately in the literature. On the one hand, the former refers to the structure, organization and boundaries of the firm, while the latter is devoted to the analysis of behaviours and strategies in particular market contexts. The novel concept underpinning this authoritative volume is that these two areas closely interact, and that a framework must be articulated in order to illustrate how linkages can be created.
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Chapter 32: Modularity and its Implications for the Theory of the Firm

Andreas Reinstaller


Andreas Reinstaller 32.1 INTRODUCTION Since the late 1980s an increasing number of researchers in the field of economics and strategic management have started to conceive technologies, firms and the economy in general as complex hierarchical systems (e.g., Anderson et al., 1988; Levinthal, 1997; Arthur, 1999). The concept of modularity refers to one set of principles related to the design and management of such systems. It is based on the seminal contributions by Herbert Simon (e.g., Simon, 1996) on human learning in complex environments and the design of complex adaptive systems. Research on modularity in economics and management has given rise to a large and still growing body of literature. This chapter gives a selective overview on important contributions to this field of research. It is organized as follows. In section 32.2 it will define the concept of modularity and examine how it is related to complex systems and near-decomposability. In section 32.3 it will discuss several aspects related to modularity as a strategy of human problem-solving. Section 32.4 then reviews recent contributions that have applied the concept of modularity to the theory of the firm and section 32.5 concludes. 32.2 COMPLEXITY, NEAR-DECOMPOSABILTIY AND MODULARITY: DEFINITIONS According to Simon (1996, p. 195), a system is complex if it is ‘made up of a large number of parts that interact in a nonsimple way’, and where the ‘whole is more than the sum of its parts’ insofar as given the characteristics of the parts and the ways they interact it is ‘not...

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