Strategic Management Journal

Strat. Mgmt. J., 23: 417–434 (2002)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.231

VALUE CREATION IN FINE ARTS: A SYSTEM

DYNAMICS MODEL OF INVERSE DEMAND AND
INFORMATION CASCADES
PHILIP CROSSLAND1 and faye l. smith2 *
1
Henry W. Bloch School of Business and Public Administration, University of
Missouri, Kansas City, Missouri, U.S.A.
2
School of Business, Emporia State University, Emporia, Kansas, U.S.A.

We integrate information cascades and demand queue behaviors as they affect the distribution of
marginal value added in the value chain. We develop a system dynamics model of the relationships
of Edward Marshall Boehm, Inc., a studio that creates hard-paste porcelain pieces of fine art
sculpture. The relationships between information cascades, demand queues, and the distribution
of marginal value added are applicable to other fine art settings and other industries. Copyright
 2002 John Wiley & Sons, Ltd.

The purpose of our paper is to illustrate the dynam-
ics of value creation in a firm that creates and
produces hard-paste porcelain sculpted artwork,
using system dynamics modeling. We have two
goals: (1) to illustrate the dynamics of information
cascades (Bikhchandani, Hirshleifer, and Welch,
1992) and an inverse demand function (Becker,
1991) in a setting where the upper bound of prices
is uncertain; and (2) to illustrate dynamic relation-
ships as value is created and as marginal value
is distributed in the value chain (Porter, 1985).
The focal organization in this study is Edward
Marshall Boehm, Inc. (Boehm) as first presented
by Quinn (1976) and updated by informant-based
materials. We provide a summary of key aspects
of the Boehm organization as background for the
systems model we present.
Systems dynamic modeling of the relationships
between information cascades and their effects
on demand functions and on contributions to
value within an organization’s value chain pro-
vides an opportunity for representing and studying
Key words: cultural industries; information cascades;
inverse demand; system dynamics; value chain
*Correspondence to: f. l. smith, School of Business, Emporia
State University, Campus Box 4058, 1200 Commercial, Empo-
ria, KS 66801, U.S.A.
an organization, including the nature of the demand
that it faces in the marketplace. By understand-
ing the assumptions and relationships among key
components of the competitive environment and
the firm’s resources, researchers and managers can
evaluate the probable related effects that may occur
if, for example, customer preferences shift. Similar
to a scale model that an architect uses to evalu-
ate the structural integrity of a building, systems
dynamic modeling allows an evaluation of both the
structure and the dynamic relationships between
components of the organizational system. In the
model designed to represent the Boehm organi-
zation, the assumptions and dynamic relationships
can be tested for their sensitivity and impact on
the cumulative value added in the value chain. The
model demonstrates how managers can identify the
critical components of their organization system
that can be leveraged to add value or to protect
existing value.
Although fine art products such as paintings or
porcelain objects are tangible goods, they share
some characteristics of intangible products pro-
duced in cultural industries. Intangible products
such as those produced in the performing arts pro-
vide expressive value. These types of products are
sensitive to social trends, and demand is difficult to

Copyright  2002 John Wiley & Sons, Ltd. Received 24 April 1998
Final revision received 9 October 2001
418 P. Crossland and f. l. smith
predict (Shamsie, 1997). Similarly, fine art objects
provide aesthetic value, rely on social trends, and
face uncertain demand functions. In addition, such
products often depend on creative talent that is par-
ticularly difficult to imitate. The Boehm organiza-
tion provides an example of three lines of tangible
products that share many of the characteristics that
describe the unique competitive challenges embed-
ded in cultural industries.
In the next section we present theoretical issues
relative to demand queues (e.g., long lines at the-
atres) and information cascades (e.g., exponential
changes in buying behavior triggered by small
bits of information), an overview of the Boehm
organization and its environment, and how the pri-
mary activities in Boehm are partitioned based on
a generalized value chain. Similarly, the meth-
ods section is organized to present the relation-
ships between demand queues, information cas-
cades, and our model of how marginal value is
distributed in the value chain of the organization.
LITERATURE REVIEW
Two related concepts have been presented to
explain unusual demand characteristics regard-
ing consumer behaviors. One concept (demand
queues) addresses how consumers react to the
public consumption of a good. The second con-
cept (information cascades) explains the process
by which information affects buyer decisions to
purchase products.
Demand queues
Sometimes successful restaurants or theaters main-
tain nonoptimal prices when they experience de-
mand for tables or seats that is greater than their
supply, and Becker (1991) offers an explanation
which assumes that demand for certain goods
depends on the demands for those goods by other
consumers. Some goods are consumed publicly,
and the visibility of their consumption (and of
those who are doing the consuming) affects the
demand for those same goods by other individu-
als. For example, the popularity of a new restau-
rant, and resulting increases in demand, may be
greater than the quality of the food, by itself,
could generate. The social interaction of dining at
a popular restaurant may convince consumers to
choose that restaurant regardless of the actual food
Copyright  2002 John Wiley & Sons, Ltd.
(and dining) preferences. Becker (1991) shows that
under circumstances such as a very popular restau-
rant, a positively inclined demand curve exists for
some indeterminate time period.
Information cascades
Localized conformity, where uniform social behav-
ior exists, may be fragile in the sense that small
shocks, or bits of information, may shift behav-
ior rather dramatically (Bikhchandani et al., 1992).
Informational cascades explain why small bits of
information can create large shifts in behavior.
Informational cascades occur ‘when it is optimal
for an individual, having observed the actions of
those ahead of him, to follow the behavior of the
preceding individual without regard to his own
information.’ (Bikhchandani et al., 1992 : 994).
According to Bikhchandani et al. (1992), in a
sequence of individuals in a queue, the first per-
son in the sequence will adopt or reject based on
his/her information signal. The second individual
can infer the first person’s signal based on that
person’s choice, and if his/her information sig-
nal matches the first person’s choice, then he/she
will make the same choice. If the second person’s
signal is different from the first person’s choice,
then he/she is indifferent between the choices. The
third person in the sequence will observe matched
choices by the first two people (either both adopt
or both reject) or that one has adopted and one
has rejected. In the former cases, the observation
of the other’s choices will induce the third person
to choose likewise, regardless of his/her indepen-
dent signal, and either an ‘up’ cascade or a ‘down’
cascade is created. In the latter case, the informa-
tion signal that the third person has will motivate
a choice, and no cascade occurs. Further, ‘cas-
cades tend to start sooner when individuals have
more precise signals of the value of adoption.’
(Bikhchandani et al., 1992: 997).
In the above scenario, the quality (e.g., accuracy)
of the signal to each individual in the queue is the
same. If, however, the quality of some individual’s
signals (leaders) is better than others (followers),
and if leaders occur earlier in the sequence, then
the first person’s choice is likely to be followed
by everyone else. Although the resulting cascade
is less informative than when individuals have rel-
atively equal signal quality, it illustrates that even
small differences in quality can shift behavior.
The fashion leader model that Bikhchandani et al.
Strat. Mgmt. J., 23: 417–434 (2002)

(1992) describe suggests that social change (e.g.,
consumer behavior) can occur faster and easier if
early leaders are persuaded to adopt the desired
behavior choice.
Bikhchandani et al. (1992) also discuss the
effects of public information. They find that
single pieces of public information, even if
the information is of lesser quality than an
individual’s private signal, can reverse a cascade.
Multiple public information disclosures affect the
probability of an ‘up’ cascade dramatically ‘even
when only very few public releases of information
occur on average.’ (Bikhchandani et al., 1992:
1007).
The relationship between demand queues and
information cascades suggests that potential cus-
tomers may enter a demand queue at different
times, and at different rates of entry. In other
words, for example, leaders, especially if they are
early adopters, may enter the demand queue at
different times and rates than late adopters. This
behavior can have two separate effects on the firm.
First, it can affect the distribution of marginal value
added within the organization’s value chain. Sec-
ondly, when an organization produces different
product lines and then markets each line through
different channels of distribution, another informa-
tion cascade can occur between the channels. For
example, information conveyed by higher-priced
lines of products may serve as a signal to buyers
of lower-priced products. This type of informa-
tion cascade, in turn, affects the distribution of
marginal value added in the value chain of each
product line.
Edward Marshall Boehm, Inc., is an organization
that illustrates the upward-sloping demand, infor-
mation cascades, the linkages between value-added
activities, and the distribution of marginal value
added among the primary activities for three prod-
uct lines of fine art objects. It is located in Tren-
ton, New Jersey, and produces hard-paste porce-
lain objects (Quinn, 1976; Boehm, 1985; Boehm
Porcelain, 1997). In the studio Edward Marshall
Boehm researched subjects, particularly flowers
and birds, and created hard-paste porcelain figures
and objects. Through his attention to detail—in
research, designs, and the porcelain process—he
earned a reputation for high-quality hard-paste
porcelain and aesthetic beauty. Mrs. Boehm pro-
moted his work to art experts, socialites, and inter-
national dignitaries. Whereas Mr. Boehm provided
the technical and artistic knowledge, Mrs. Boehm
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 419
helped create information cascades and demand
queues through her presentations of Boehm objects
to information leaders. In the next section we
present how Boehm activities can be categorized
as a value chain (Porter, 1985) for our model.
Although the activities, themselves, add value that
often can be relatively obvious to observers, the
linkages may add value that is subtle and less eas-
ily imitated by competitors.
Categorizing Boehm activities
Edward Marshall Boehm developed a unique mul-
tistep process for producing high-quality porcelain
from which his detailed sculptures were made. The
steps of the process were identified from public
sources of information (Palley, 1976). Each author
independently categorized the steps according to
the value chain (Porter, 1985). The authors agreed
on 98 percent of the categorizations, and another
34 raters categorized the tasks also.1
The inbound logistics activity consists of receiv-
ing, storing, and disseminating inputs. In the case
of Boehm, one of the inbound logistics activities
was to observe subjects (i.e., birds) in their nat-
ural environments, or obtain subjects and house
them at the Boehm estate. From these observa-
tions, Edward Boehm (and apprentices) sketched
the subject and a representative natural environ-
ment (e.g., hummingbirds feeding their young).
From the sketch, the artisans make a model that
is approximately 13 percent larger than the size
of the desired finished product, and this model is
separated into its component pieces. For our study,
we have designated activities that occur after the
scaled-up mold has been separated as operations
activities.2
Operations activities transform inputs into the
final product. The process of making the casting
1
After the authors categorized the activities, 34 raters who were
knowledgeable about value chain concepts, artists who worked
with porcelain, and/or who had no knowledge of either the
value chain or porcelain also categorized the Boehm activities.
Agreement with the authors for 16 tasks was greater than 74
percent, and in the six categories where agreement was less
than 74 percent all were on the ‘borders’ between two primary
activities, such as inbound logistics and operations. All of the
results were consistent with Porter and Fuller’s (1986) simplified
value chain.
2
Although the authors agreed on how activities should be clas-
sified, two caveats remain: (1) from our reading of public infor-
mation and private communications with Boehm representatives,
it appears that the transition from one activity to another is rel-
atively seamless, and (2) first-hand observation of the activities
might alter our classifications.
Strat. Mgmt. J., 23: 417–434 (2002)
420 P. Crossland and f. l. smith
molds, making the clay slip, firing the compo-
nents and assembling them, painting the assembled
sculpture, and refiring it are all part of transforming
the artist’s sketch into a porcelain figure. Much
of the process work is done by hand and it may
require up to several months, and in some instances
years, to conceive an idea, research the subject,
create the sketch, solve anticipated technical prob-
lems, mold, cast, paint, and fire the finished prod-
uct. For example, even a relatively simple flower
may have more than 20 components, and each
of these components is quite delicate and frag-
ile.3 More complex pieces may have hundreds of
components that must be assembled so that the
naked eye cannot discern where the components
are attached to one another. In 1995 a commis-
sioned piece measured over 3 feet high, weighed
more than 80 pounds, and it took a dozen skilled
artisans, craftsmen, and technicians nearly a year,
using 129 separate molds, to create the 829 indi-
vidual parts (Boehm Porcelain, 1997).
Outbound logistics includes the activities associ-
ated with physically distributing the product. For
Boehm, this involves processing orders, packing
the sculptures, and shipping the product. Market-
ing and sales activities induce buyers to purchase
products. Historically, Boehm has capitalized on
notoriety generated at events such as when pieces
are added to museums, when presidents select
Boehm gifts for heads of state, and when the Nobel
Committee presents its peace awards. These events
generate repeated recognition of Boehm talent and
quality products.
At Boehm, after-sales service is available to
customers through restoration of damaged pieces,
and by providing appraisals and accepting items on
consignment at galleries. If heirs wish to sell some
of a collection from an estate, Boehm studios will
display and sell the pieces.
MODELING VALUE CREATION AT
BOEHM
One of the issues associated with system dynamics
modeling is how to test a model’s validity. Since
more traditional validity tests may not be appro-
priate for some types of systems models, it may
3
As one Boehm dealer noted, handling the fragile Boehm
sculptures is like handling thin potato chips; it is easy to break
them.
Copyright  2002 John Wiley & Sons, Ltd.
be necessary to use other means to examine valid-
ity. In the next section we present some of the
issues surrounding model validation, and then we
design our system dynamics model of the Boehm
organization and its competitive environment.
System dynamics modeling
System dynamics modeling allows researchers to
specify stocks and flows of resources, and the relat-
edness of decisions about those resources (For-
rester, 1976; Legasto, Forrester, and Lyneis, 1980;
Morecroft, 1984; Morecroft and Sterman, 1994;
Senge, 1990). Relatedness may be in the form of
direct or indirect feedback loops (with or without
time lags) that reinforce or dampen effects from
other decisions. The process of modeling strategic
decision environments compels researchers to spec-
ify assumptions and variables explicitly (Ginsberg,
Larsen, and Lomi, 1996; Gorman et al., 1997; Hall,
1976; Lomi, Larsen, and Ginsberg, 1997; More-
croft, 1984; Porter, 1991; Schoemaker, 1993).
Dynamic models can be classified as white box
and black box (Barlas, 1996). Black-box models
are data driven, and comparing the forecast out-
come with actual outcomes can test their valid-
ity. White-box models are descriptive and theory-
like in that they try to explain the behavior of a
system. System dynamics models, which are of
the white-box type, exhibit validity if their inter-
nal structure adequately represents the issues rel-
evant to the behavior being described. Further,
the internal structure cannot be validated from an
entirely objective, formal, and quantitative per-
spective (Barlas, 1996). Software designed for
building system dynamic models assists in clarify-
ing the internal logic of relationships. The respon-
sibility for the accuracy of the description of the
system that is being modeled, however, remains
with the researcher. The availability of system
dynamics software facilitates applying concepts,
such as the value chain, to case studies. We chose
High Performance System’s ithink  (1994) soft-
ware for our study.
Direct structure tests can examine the structural
validity of the model either empirically or theoret-
ically. If quantitative information is not available
for an empirical test, then the model can be tested
by comparing it with knowledge about the system
(Barlas, 1996; Forrester and Senge, 1980). For a
structure-oriented behavior test, the modeler exam-
ines parameters that may be particularly sensitive,
Strat. Mgmt. J., 23: 417–434 (2002)

and questions whether the real system would be
equally sensitive (Barlas, 1996). Once structure
validity is evaluated, the model can also be sub-
jected to behavior pattern tests. These tests exam-
ine how accurately the model reproduces behavior
patterns, such as frequencies, trends, and lags (Bar-
las, 1996). We examine the validity of the model
by using public and informant-based knowledge of
how value is created in the organization to deter-
mine whether the model reflects upward-sloping
demand and information cascades.
Model for Edward Marshall Boehm, Inc.
In our overall model, exogenous information trig-
gers potential customer demand. The potential cus-
tomers form a demand queue based on their indi-
vidual demand functions. Demand flows through
marketing channels to the organization, where
value is created as represented by the value chain.
We discuss how demand accumulates and flows
through the channels and value chain. The model
is designed for 52 time periods, which we have
labeled weeks. The mathematical equations for
each section of our model are categorized as
stocks (S1. . .S33), flows (F1. . .F46), and auxiliary
(A1. . .A21) variables and presented in Appendices
1 and 2.4
Quinn (1976) suggests three price categories,
and updated information suggests that in addition
to the exclusive items Boehm products can be
broadly divided into those products that are lim-
ited editions and those that are open editions. In
our model the first marketing channel represents
orders for exclusive, expensive items (the upper
line); the second channel represents those orders
for limited edition items (the middle line); and the
third channel represents those orders for open edi-
tion, relatively inexpensive items (the lower line).
Exogenous information accumulates as a pool
(stock) labeled S1, Exogenous Info Stock in
Figure 1. In the case of hard-paste porcelain,
exogenous information would include, for exam-
ple, knowledge about the raw materials and pro-
cess for making hard-paste porcelain, as well as
the artistic value of the piece. The original tech-
nique was developed in ancient China and even-
tually migrated to Europe and England. In the
4
Some equations contain nonlinear temporal values used for the
model. These values are included as graphs of data used in the
model rather than equations. See Appendix 2.
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 421
early 1700s the technique was finally mastered and
the first hard-paste factory established in Meissen
(Corsentino, 1985; Cushion, 1966). European and
English factories that made bone china satisfied
the market for porcelain in the United States until
the 1950s, when Boehm helped perfect American-
made hard-paste porcelain. The transfer of tech-
nical knowledge, combined with Boehm’s artistic
talent and Mrs. Boehm’s marketing skills, was a
turning point in the development of Boehm figures
and hard-paste porcelain in the United States. This
illustrates how once the stock of exogenous infor-
mation reaches a threshold, or critical mass, it
becomes salient to potential customers.
Potential customers and the information
cascade
In our model, there are three types of potential
customers that are most likely to recognize the
value of the artwork based on their knowledge of
exogenous information, and their prior purchases
of artwork. The first group to recognize the value
is cognoscenti, such as museum curators. A sec-
ond set of customers is investors, who purchase art
for its potential monetary appreciation. We expect
that investors will be less knowledgeable about
the aesthetic or technical quality of the artwork
(Fulford, 1995), but that they will recognize (and
follow) the decision behaviors of cognoscenti. A
third set of customers is private, wealthy collec-
tors, who purchase artwork for their personal col-
lections, and who appreciate the artwork for its
intrinsic value (Pollack, 1997). Again, we expect
that collectors will imitate the decision behaviors
of the cognoscenti in terms of their purchase out-
comes, but will be motivated to purchase by dif-
ferent information cues. An information cascade
occurs from the cognoscenti to the investors and
collectors, much like Bikhchandani et al. (1992)
and The Economist (1994) describe in discussions
of the fashion leader model. This, in turn, generates
the demand queue discussed in the next section.
Figure 1 illustrates the relationships between the
sets of potential customers.
The three potential types of customers for art
objects are labeled P-cognoscenti, P-investors, and
P-collectors in Figure 1. Exogenous information
about the uniqueness, attractiveness, and value
of the exclusive or one-of-a-kind items motivates
some potential buyers in each set to take action and
become actual customers for Boehm art objects
Strat. Mgmt. J., 23: 417–434 (2002)
 422

Exogenous Info Stock

Exogenous Info

Info Switch 1

Copyright  2002 John Wiley & Sons, Ltd.

P Cognoscenti Cognoscenti Stock
Cog Converts Cognoscenti Cognoscenti Orders
P. Crossland and f. l. smith

Cog Convert Rate Cog Loss Pct

P Investors Investor Stock Demand Queue Info Stock 1

Invest Converts Investors Investor Orders

Invest Loss Pct True Upper Line Demand

Invest Convert Rate

P Collectors Collector Stock

Collect Converts Collectors Collector Orders

Collect Convert Rate Collect Loss Pct

Figure 1. Model of exogenous information, potential customers, information cascade, and demand queue

Strat. Mgmt. J., 23: 417–434 (2002)


(labeled A1, Info Switch 1). The cognoscenti, as
leaders, evaluate the aesthetic and technical quality
of the artwork more quickly than the other sets, but
there are fewer total cognoscenti than there are
other types of potential buyers. In Figure 1 this
behavior is represented by the conversion rate that
regulates the flow of cognoscenti into the stock
of cognoscenti. The rate at which each type joins
the stock of potential buyers is reflected by con-
version rates (e.g., A2, Cog Convert Rate). Not
all of the stock of buyers will actually purchase,
and the percentage of buyers that do not stay in
the market is reflected in the loss percentages in
Figure 1 (e.g., A3, Cog Loss Pct), such as when
some museum curators do not remain as potential
customers, or may postpone their decisions until a
later date. In our model, the cognoscenti are the
first to enter the demand queue, and by their tak-
ing action they signal the value of Boehm objects
to investors and collectors, and create an informa-
tion cascade. For example, once the curator of the
Metropolitan Museum in New York City learned
about Boehm sculpture, the monetary value of the
sculptures appreciated, making them more attrac-
tive to investors. This behavior endows the artwork
with status attributes and visibility that are attrac-
tive features to potential private collectors.
Each of the three sets of potential customers
experiences a different rate of accumulation. In
the model the conversion rate and the loss per-
cent can be set to reflect expectations about actual
behavior, and adjusted during sensitivity testing
of the model. For example, one might expect
that the conversion rate regulating the accumula-
tion of cognoscenti might be a step function, a
linear function, or a constant, and each can be
tested in the model. The modeler can examine
the quantitative results to compare them against
actual quantitative data provided by an organiza-
tion if available, or he/she can examine the out-
put for its reasonableness relative to forecasted
scenarios.
We expect investors to convert at a different rate
than cognoscenti (or private collectors). Investors
are expected to observe the decisions made by
the cognoscenti and anticipate that the monetary
value of the art will increase. Given their motive,
investors are expected to accumulate relatively
quickly, and this would be reflected in their con-
version rate. Once the price of the art pieces
reaches a predetermined figure in the model, we
expect investors to divest their holdings and leave
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 423
the market at an accelerated rate as reflected in the
investor loss percent.
Private collectors are expected to observe deci-
sions made by the cognoscenti and choose to fol-
low those decisions, even though the collectors
may not fully appreciate the artistic value of the
artwork. To a collector, the artwork may be desired
for its beauty, but in addition, it may be valued for
its ability to convey status. For example, owning
a Boehm may be as important to the collector as
its aesthetic quality. We expect a greater lag time
between cognoscenti purchase decisions and col-
lector decisions than we would observe between
cognoscenti and investors. We also expect that col-
lectors will join the stock of potential customers at
a slower rate than either cognoscenti or investors,
but that they will remain in the stock of potential
customers much longer.
Demand queue for artwork
The potential customers generate a demand queue
that represents those who are both willing and
can afford the upper line product (true upper line
demand). Cognoscenti are the leaders in the infor-
mation transfer about the value of artwork, and
they enter the demand queue prior to investors or
collectors. After some time lag, investors reveal
their demand preferences, and after a subsequent
lag collectors join the demand queue. The model of
the information cascade represented in the poten-
tial customers sector generates an upward-sloping
demand curve (Becker, 1991) in the demand queue
as illustrated by the graph in Figure 2. The ini-
tial demand beginning in period 3 represents the
cognoscenti, the second represents the investors in
period 6, and the third upward slope represents
the collectors beginning in period 9. The sharp
decline in the demand curve represents the return
of demand to a traditional price/quantity relation-
ship. It is this demand curve that the first channel
in the next sector of our model faces when orders
are released from the queue.
Channel 1 upper line
Orders are released from the demand queue and
move into the first channel for the exclusive items,
such as those that are custom designed for heads
of state or for museum collections. Orders flow
into the organization, and we have modeled them
to be released on a first-in, first-out basis via a
Strat. Mgmt. J., 23: 417–434 (2002)
424 P. Crossland and f. l. smith
18
16
14
12
10
8
6
0
1 5 9 13 17 21
Figure 2. Positively shaped demand curve, generated by model
conveyor function. The information in Channel 1
represents the orders and preferences received for
exclusive items, and we have designated this as
F11, True Upper Line Demand in the model (see
Figure 3). Demand information accumulates (S9,
Info Stock 1), and is released into the value chain
when actual orders are placed (S10, Channel 1
Orders). For exclusive items, the conversion rate
(A9, Info Convert 1) regulates the conversion of
true upper line demand into actual orders. The
quantity of actual orders is converted by Boehm’s
price strategy over time (A10, Unit Price Strategy
1) into what we have designated as price correct
orders for the value chain.
For the exclusive upper line items, the precision
of the research, artistic talent, and working with
the hard-paste porcelain process are expected to
contribute the greatest marginal value to the over-
all value of the product. To reflect this, we set
the initial value for inbound logistics as contribut-
ing 35 percent of the total value contributed by
the five primary activities. The inbound logistics
activity stock of value is captured in the stock
variable, S11, VC1IL. Similarly, the stocks of
marginal value added for each activity are captured
throughout the value chain. In value chain 1, oper-
ations (S12, VC1OPS), outbound logistics (S13,
VC1OL), marketing and sales (S14, VC1M&S),
and after-sales services (S15, VC1SER) contribute
30, 5, 20, and 10 percent respectively. The cumu-
lative value from each activity in value chain 1
Copyright  2002 John Wiley & Sons, Ltd.
Coll Orders
Inv Orders
Cog Orders
25 29 33 37 41 45 49
(S16, Cumulative Value Added 1) is stored and
contributes to the total value.
Channels 2 and 3 information cascades
The Channel 2 Trigger (A8) in Figure 3 illustrates
the information that cascades from the Channel
1 upper line to the channel 2 middle line. The
upper line marketing channel preferences revealed
through offerings of upper line products, such as
through galleries and museums, are visible to retail
channels whose managers track and identify trends
and become early followers of the preferences
revealed in the upper line channel. This informa-
tion cascade attracts and stimulates a second wave
of distribution for middle line products in the sec-
ond marketing channel.
In Figure 3, the information from Channel 1,
based on true upper line demand, is available to
the Channel 2 retail demand for a middle line
of products, through the Channel 2 Trigger (A8).
When modeling this information cascade from
Channel 1 to Channel 2, the threshold quantity
at which the organization realizes the need for
products that can be offered as limited edition,
middle line products can be based on demand
patterns for the exclusive items. For the purposes
of our model of this type of behavior, we set
the trigger point at 20 units per week, meaning
that when the information stock value for Channel
1 gets to that point, it will ‘trigger’ the need
Strat. Mgmt. J., 23: 417–434 (2002)
 D Queue
VC 1 IL
True Upper Line demand IL 1 Activities Mar VA IL 1

VC 1 OPS
Unit Price Strategy 1 OPS 1 Activities Mar VA OPS 1

Copyright  2002 John Wiley & Sons, Ltd.

Channel 2 Trigger

Info Stock 1
VC 1 OL
OL 1 Activities Mar VA OL 1
Price Correct Orders 1

Info Flow 1

VC 1 M&S
M&S 1 Activities Mar VA M&S 1
Info Convert 1

VC 1 SER
Channel 1 Orders SER 1 Activities Mar VA SER 1

Cumulative Value Added 1

Value Creation in Fine Arts

Figure 3. Model of Channel 1, Value Chain 1, and channels information cascade

Strat. Mgmt. J., 23: 417–434 (2002)

425
426 P. Crossland and f. l. smith
for limited edition, middle line items. A similar
information cascade occurs between the second
channel and the third channel for the open edition,
lower line items.
Channels 2 and 3 value chains
Channel 2 receives information from Channel 1,
and enables S17, Latent Demand Middle Line (see
Figure 4). Latent demand represents customers
who were unaware of Boehm prior to the intro-
duction of a middle line of products. The flow of
latent demand (F23, Latent D2 Flow) into Chan-
nel 2 depends on the rate at which potential buy-
ers convert into actual buyers. The actual buyers’
demand makes up the stock of Channel 2 orders
(S19). The process of orders entering the value
chain (A14, Unit Price Strategy 2 and A15, Price
Correct Orders 2) is the same process as occurs
in Channel 1. The marginal value added by each
primary activity, however, is different from Value
Chain 1. The artistic talent and complexity of the
design content are less than for exclusive items.
The differences are reflected in the percent of value
added derived from each of the activities. In our
model the value added for the five activities are
distributed as 30, 30, 5, 30, and 5 percent, respec-
tively, and results in cumulative value added (S25,
Cumulative Value Added 2).
The third value chain represents the lower line,
and is constructed in a similar manner as the
second value chain. Similar to the second chan-
nel, there is latent demand for lower line items.
The information cascade from the second chan-
nel is reflected in a Channel 3 Trigger (See A16,
Appendix 1). The values for conversion rates and
value added for the activities differ. For example,
we would expect the inbound logistics marginal
value is weighted less heavily for value chain. To
reflect this, the value added for the five activities
was set at 15, 30, 5, 45, and 5 percent, respec-
tively.5
The three value chains contribute to the overall
value added within the organization. Each value
chain in the model can be evaluated by chang-
ing the initial distribution of expected value added
by each activity if desired. For example, if man-
agement were to analyze shifting preferences for
one line of products and find that artistic talent
5
The figure for Channel 3 has been omitted, but is structurally
similar to Figure 4.
Copyright  2002 John Wiley & Sons, Ltd.
contributed more or less proportional value to a
product line, it could test its new scenario by
adjusting the initial values in the model. The model
can also provide sensitivity testing, for example,
about how the conversion rate of cognoscenti to
the demand queue may affect the cumulative value
added for all the product lines. The model gen-
erates cumulative value and shows how marginal
value added contributes to the value chain based
on the explicit assumptions built into the model.
To illustrate the output from the model, Figure 5
depicts the marginal value added in the second
value chain to illustrate this feature of the model.
The model will also generate the cumulative value
for Channels 2 and 3.
DISCUSSION
We have presented a system dynamics model of
the relationships between demand queues, infor-
mation cascades, and the distribution of marginal
value added in the value chains of an organiza-
tion that creates porcelain objects. The demand
queue created by three types of buyers for exclu-
sive items produces a demand function that slopes
upward for some period of time. Further, an infor-
mation cascade occurs from leaders to followers,
such as from one type of buyer of upper line items
(cognoscenti) to others (investors and private col-
lectors). Upper line items are marketed through
channels such as museums and galleries, and result
in contributions of marginal value added in the
value chain that are different from the distribution
of marginal value added in middle and lower line
value chains. The results generated by our model
are consistent with an upward-sloping demand for
upper line items, and marginal value-added contri-
butions consistent with upper, middle, and lower
line value chains. As Barlas (1996) suggests, the
upward-sloping demand curve, the marginal value
contributions, and the information cascades that
occur among potential customers and across prod-
uct lines demonstrate the validity of our model.
The model adequately represents the issues rele-
vant to the behaviors being described.
Although some of the artistic and technical pro-
cesses described in this study are unique to hard-
paste porcelain, many of the demand characteris-
tics and value-creating activities can be general-
ized to other fine arts organizations. For exam-
ple, creative processes often entail a period of
Strat. Mgmt. J., 23: 417–434 (2002)
 Latent Demand Middle Line
VC 2 IL
IL 2 Activities Mar VA IL 2

Latent D 2 Convert Latent D 2 Flow

VC 2 OPS
Unit Price Strategy 2 OPS 2 Activities Mar VA OPS 2

Copyright  2002 John Wiley & Sons, Ltd.

VC 2 OL
OL 2 Activities Mar VA OL 2
Info Stock 2
Price Correct Orders 2

VC 2 M&S
M&S 2 Activities Mar VA M&S 2
Channel 2 Trigger Info Flow 2

VC 2 SER
SER 2 Activities Mar VA SER 2

Channel 2 Orders

Cumulative Value Added 2

Value Creation in Fine Arts

Figure 4. Model of Channel 2

Strat. Mgmt. J., 23: 417–434 (2002)

427
428 P. Crossland and f. l. smith
60000
50000
40000
30000
20000
10000
0
1 5 9 13 17 21 25
Figure 5. Marginal value added in Value Chain 2, generated by model
reflection and observation before the idea crys-
tallizes and is transformed into a product. Addi-
tionally, artists can seldom create fine art, whether
it is a painting or a piece of music or a script,
without understanding the medium through which
their artistic talent will be expressed. The rela-
tionships between exogenous information, poten-
tial customers, and demand queues apply to other
fine art settings, and to other environments where
demand queues occur.
There are three information cascades that could
be modeled in this study: (1) from leaders to fol-
lowers in the upper line; (2) among Channels 1,
2, and 3; and (3) among Value Chains 1, 2, and
3. In this paper, we elected to model the first
two types of information cascades, which repre-
sent the information cascades that occur outside
the organization’s creative and productive organi-
zational boundaries. Within the organization, how-
ever, artistic and technical knowledge may cas-
cade from one value chain to another. Knowledge
gained by designing upper line products can be
applied to items that are designed for middle line
and lower line products. In other words, infor-
mation can be transferred from one product line
to another. For example, if cognoscenti express a
preference for a different type of bird or animal,
this preference would be received in the inbound
logistics activity of Value Chain 1 so that research
could begin about the design characteristics of such
an item, and then later used for the design of
Copyright  2002 John Wiley & Sons, Ltd.
Mar VA SER 2
Mar VA M&S 2
Mar VA OL 2
Mar VA OPS 2
Mar VA IL 2
29 33 37 41 45 49
middle line and lower line items. The information
overlap between the value chains introduces an
information cascade within the organization when
it shares design ideas among various price/quality
categories of products.
The critical resources appear to fit the criteria
proposed by the resource-based theoretical per-
spective (Barney, 1986, 1991; Black and Boal,
1994; Wernerfelt, 1984). The technology of the
complex multistep process for creating the porce-
lain might be replicated if competitors were to
invest in the process, but the artistic talent is rare
and unique. The synergy derived from the combi-
nation (linkage) of the technological process and
the inimitable artistic talent is another source of
competitive advantage. Artistic creators and their
organizations appear to present opportunities for
further empirical research of the resource-based
view of the firm (Miller and Shamsie, 1996).
System dynamics models are of the white-box
type, and exhibit validity if their internal structure
adequately represents the issues relevant to the
behavior being described. The system dynamics
modeling techniques present an alternative to tra-
ditional hypothesis testing. Statistical tests allow
researchers to make inferences about the signif-
icance of their results. Two criteria for testing
dynamic models are: (1) analysis of a real sys-
tem; and (2) modeling an existing theory (Bar-
las, 1996). Rather than pitting one method against
another, we suggest that both methods contribute
Strat. Mgmt. J., 23: 417–434 (2002)

to our understanding of complex organizations.
It is from this perspective that we demonstrate
how dynamic modeling can enable researchers
to capture the nuances and ambiguity of related
decisions about resources and their contribution
to sustainable competitive advantage. As is true
with any modeling methodology, system dynamics
requires that researchers make assumptions about
relationships. These assumptions, however, can
be expressed with quantitative values so that the
researcher can examine how sensitive the model is
to changes.
Models allow executives to experiment with dif-
ferent management options to see how those deci-
sions might improve their sustainable competitive
advantage (de Geus, 1997). Not only are sources of
value perceived differently by departments or divi-
sions in an organization, but also perceptions of
the degree to which value is added throughout the
value chain may result in disagreements. Further,
as organizations capitalize on their value-adding
activities, organization members learn to articulate
the unique linkages between the activities that lead
to competitive advantage. Learning occurs when
the set of potential behaviors is increased (Huber,
1991). Both intentional and unintentional informa-
tion cascades can occur, triggering learning.
In this paper we have modeled the relationships
between intentional and unintentional information
cascades as they translate into a demand queue
and value for a representative organization that
relies on artistic talent. Our white-box type of
model exhibits validity (Barlas, 1996; Sterman,
2000) in that it accurately describes the behaviors
we intended to simulate: upward-sloping demand
queues consisting of three types of buyers (Becker,
1991); information cascades that cause exponen-
tial changes in buying behavior (Bikhchandani
et al., 1992); and linkages between value-added
activities and the distribution of marginal value
added among the primary activities for three prod-
uct lines (Porter, 1985).6 The Boehm organization
6
To test the stability of our model we checked the time step
(dt) using the ‘1/2-test’ (Peterson and Richmond, 1994: Ch. 11;
p. 5), setting the time step (dt) at 1.0, 0.5, 0.25, and 0.125.
The output of the model did not change, which is a measure
of the model’s stability. For example, the pattern of our results
indicating the upward-sloping demand behavior in the model
remained consistent when the time step (dt) was halved three
times. If the behavior of the model had been an artifact of
computation rather than the relationships in the system, then one
would expect that the pattern of demand would have exhibited
a different behavior at the smaller time steps.
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 429
was used to illustrate the behaviors and to sug-
gest the challenge of designing competitive strate-
gies that capitalize on tacit knowledge that is a
basis for competitive advantage. We offer the sys-
tem dynamics modeling method as one means of
capturing more of the ‘system’ associated with
competitive dynamics. Organizations can use sys-
tem dynamics modeling to identify resources and
linkages between resources to sustain their com-
petitive advantage. Further, our use of an organiza-
tion that has a competitive advantage in its artistic
design illustrates some of the similarity and differ-
ences between cultural industries and traditional
manufacturing industries.
ACKNOWLEDGEMENTS
An earlier version of this paper was presented at a
conference on Research Perspectives on the Man-
agement of Cultural Industries, The Stern School
of Business, New York University. We would like
to thank Elaine O. Henry, MFA, for sharing her
expertise as a three-dimensional ceramic artist.
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APPENDIX 1: MODEL EQUATIONS
Figure 1: Model of exogenous information, poten-
tial customers, information cascade, and demand
queue
Stocks
S1: Exogenous Information Stock(t) = Exoge-
nous Information Stock(t − dt) + (Exogenous
Information) * dt Initial Value of Exogenous
Information Stock = 1
S2: P Cognoscenti(t) = P Cognoscenti(t − dt)
+ (Cognoscenti Converts − Cognoscenti)
* dt
S3: Cognoscenti Stock(t) = Cognoscenti Stock
(t − dt) + (Cognoscenti − Cognoscenti
Orders) * dt
S4: P Investors(t) = P Investors(t − dt) + (In-
vestor Converts − Investors) * dt
S5: Investor Stock(t) = Investor Stock(t − dt) +
(Investors − Investor Orders) * dt
S6: P Collectors(t) = P Collectors(t − dt) + (Col-
lector Converts − Collectors) * dt
S7: Collector Stock(t) = Collector Stock(t − dt) +
(Collectors − Collector Orders) * dt
S8: Demand Queue(t) = Demand Queue(t − dt)
+ (Cognoscenti Orders + Investor Orders +
Strat. Mgmt. J., 23: 417–434 (2002)

Collector Orders − True Upper Line Demand)
* dt
S9: Information Stock 1(t) = Information Stock
1(t − dt) + (True Upper Line Demand −
Information Flow 1) * dt
Flows
F1: Exogenous Information = 5
F2: Cognoscenti Converts = (P Cognoscenti +
5) * Cognoscenti Convert Rate
F3: Cognoscenti = P Cognoscenti * Cognoscenti
Loss Percent * Information Switch 1
F4: Cognoscenti Orders = Cognoscenti Stock
F5: Investor Converts = P Investors * Investor
Convert Rate
F6: Investors = IF Cognoscenti > 1.5, THEN P
Investors * Investor loss Percent; ELSE 0
F7: Investor Orders = Investor Stock
F8: Collector Converts = (P Collectors) * Col-
lector Convert Rate
F9: Collectors = IF Cognoscenti > 2.2, THEN P
Collectors * Collector Loss Percent; ELSE 0
F10: Collector Orders = Collector Stock
F11: True Upper Line Demand = Demand Queue
Flow
Auxiliary
A1: Info Switch 1 = IF(Exogenous Information
Stock > 10), THEN (1); ELSE (0)
A2: Cognoscenti Convert Rate (See Appendix 2)
A3: Cognoscenti Loss Percent = 60
A4: Investor Convert Rate (See Appendix 2)
A5: Investor Loss Percent = 30
A6: Collect Convert Rate (See Appendix 2)
A7: Collect Loss Percent = 20
Figure 3: Model of Channel 1, Value Chain 1, and
channels information cascade
Stocks
S10: Channel 1 Orders(t) = Channel 1 Orders
(t − dt) + (Information Flow 1 − Channel
1 Order Flow 1) * dt
S11: ValueChain 1 InboundLogistics(t) = Val-
ueChain 1 InboundLogistics(t − dt) + (In-
boundLogistics 1 Activity − Marginal Val-
ueAdded InboundLogistics) * dt
S12: ValueChain 1 Operations(t) = ValueChain
1 Operations(t − dt) + (Operations 1 Activ-
ity − Marginal ValueAdded Operations)
* dt
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 431
S13: ValueChain 1 OutboundLogistics(t) = Val-
ueChain 1 OutboundLogistics(t − dt) +
(OutboundLogistics 1 Activity − Marginal
ValueAdded OutboundLogistics) * dt
S14: ValueChain 1 Marketing&Sales(t) = Val-
ueChain 1 Marketing&Sales(t − dt) + (Mar-
keting&Sales 1 Activity − Marginal Val-
ueAdded Marketing&Sales) * dt
S15: ValueChain 1 Service(t) = ValueChain 1
Service(t − dt) + (Service 1 Activity −
Marginal ValueAdded Service) * dt
S16: Cumulative Value Added 1(t) = Cumu-
lative ValueAdded 1(t − dt) + (Marginal
ValueAdded InboundLogistics + Marginal
ValueAdded Operations + Marginal Val-
ueAdded OutboundLogistics + Marginal
ValueAdded Marketing&Sales + Marginal
ValueAdded Service − Cumulative Val-
ueAdded 1 Flow 1) * dt
Flows
F12: Information Flow 1 = True Upper Line
Demand * Information Convert 1
F13: InboundLogistics 1 Activity = Price Correct
Orders * 0.35
F14: Marginal ValueAdded InboundLogistics =
ValueChain 1 InboundLogistics
F15: Operations 1 Activity = Price Correct Orders
* 0.30
F16: Marginal ValueAdded Operations = Val-
ueChain 1 Operations
F17: OutboundLogistics 1 Activity = Price Cor-
rect Orders * 0.05
F18: Marginal ValueAdded OutboundLogistics =
ValueChain 1 OutboundLogistics
F19: Marketing&Sales 1 Activity = Price Correct
Orders * 0.20
F20: Marginal ValueAdded Marketing&Sales =
ValueChain 1 Marketing&Sales
F21: Service 1 Activity = Price Correct Orders *
0.10
F22: Marginal ValueAdded Service = ValueChain
1 Service
Auxiliary
A8: Channel 2 Trigger = IF (Information Stock
1) > 20, THEN (1); ELSE (0)
A9: Info Convert 1 (See Appendix 2)
A10: Unit Price Strategy 1 (See Appendix 2)
A11: Price Correct Orders 1 = Channel 1 Orders
* Unit Price Strategy 1
Strat. Mgmt. J., 23: 417–434 (2002)
432 P. Crossland and f. l. smith
Figure 4: Model of Channel 2
Stocks
S17: Latent Demand2 Middle Line(t) = Latent
Demand2 Middle Line(t − dt) + (− Latent
Demand2 Flow) * dt Initial Latent Demand2
Middle Line = 4000
S18: Information Stock 2(t) = Information Stock
2(t − dt) + (Latent Demand2 Flow − Infor-
mation Flow 2) * dt
S19: Channel 2 Orders(t) = Channel 2 Orders(t −
dt) + (Information Flow 2 − Channel 2
Order Flow 2) * dt
S20: ValueChain 2 InboundLogistics(t) = Val-
ueChain 2 InboundLogistics(t − dt) + (In-
boundLogistics 2 Activity − Marginal Val-
ueAdded InboundLogistics 2) * dt
S21: ValueChain 2 Operations(t) = ValueChain 2
Operations(t − dt) + (Operations 2 Activity
− Marginal ValueAdded Operations 2)
* dt
S22: ValueChain 2 OutboundLogistics(t) = Val-
ueChain 2 OutboundLogistics(t − dt) +
(OutboundLogistics 2 Activity − Marginal
ValueAdded OutboundLogistics 2) * dt
S23: ValueChain 2 Marketing&Sales(t) = Val-
ueChain 2 Marketing&Sales(t − dt) + (Mar-
keting&Sales 2 Activity − Marginal Val-
ueAdded Marketing&Sales 2) * dt
S24: ValueChain 2 Service(t) = ValueChain 2
Service(t − dt) + (Service 2 Activity −
Marginal ValueAdded Service 2) * dt
S25: Cumulative Value Added 2(t) = Cumula-
tive ValueAdded 2(t − dt) + (Marginal Val-
ueAdded InboundLogistics 2 + Marginal
ValueAdded Operations 2 + Marginal Val-
ueAdded Marketing&Sales 2 + Marginal
ValueAdded Service 2 + Marginal Value-
Added OutboundLogistics 2 − Cumulative
ValueAdded2 Flow 2) * dt
Flows
F23: Latent Demand2 Flow = Latent Demand2
Middle Line * Latent Demand2 Convert
F24: Information Flow 2 = Latent Demand2 Flow
* Information Convert 2 * Channel 2 Trigger
F25: IL 2 Act = Price Correct Orders2 * 0.30
F26: Marginal ValueAdded InboundLogistics 2 =
ValueChain 2 InboundLogistics
F27: Operations 2 Activity = Price Correct
Orders2 * 0.30
Copyright  2002 John Wiley & Sons, Ltd.
F28: Marginal ValueAdded Operations 2 = Val-
ueChain 2 Operations
F29: OutboundLogistics 2 Activity = Price Cor-
rect Orders2 * 0.05
F30: Marginal ValueAdded OutboundLogistics 2
= ValueChain 2 OutboundLogistics
F31: Marketing&Sales 2 Activity = Price Correct
Orders2 * 0.30
F32: Marginal ValueAdded Marketing&Sales 2 =
ValueChain 2 Marketing&Sales
F33: Service 2 Activity = Price Correct Orders2
* 0.05
F34: Marginal ValueAdded Service 2 = Value-
Chain 2 Service
Auxiliary
A8: Channel 2 Trigger = IF (Information Stock
1) > 20, THEN (1); ELSE (0)
A12: Latent Demand2 Convert (See Appendix 2)
A13: Information Convert 2 (See Appendix 2)
A14: Unit Price Strategy 2 (See Appendix 2)
A15: Price Correct Orders 2 = Channel 2 Orders
* Unit Price Strategy 2
Value Chain 3 equations; no diagram included as
a figure
Stocks
S26: Information Stock 3(t) = Information Stock
3(t − dt) + (Latent Demand3 − Information
Flow 3) * dt Initial Value of Latent Demand3
Low Line = 50000
S27: Channel 3 Orders(t) = Channel 3 Orders(t −
dt) + (Information Flow 3 − Channel 3
Order Flow 3) * dt
S28: ValueChain 3 InboundLogistics(t) = Val-
ueChain 3 InboundLogistics(t − dt) + (In-
boundLogistics 3 Activity − Marginal Val-
ueAdded InboundLogistics 3) * dt
S29: ValueChain 3 Operations(t) = ValueChain
3 Operations(t − dt) + (Operations 3 Activ-
ity − Marginal ValueAdded Operations 3)
* dt
S30: ValueChain 3 OutboundLogistics(t) = Val-
ueChain 3 OutboundLogistics(t − dt) +
(OutboundLogistics 3 Activity − Marginal
ValueAdded OutboundLogistics 3) * dt
S31: ValueChain 3 Marketing&Sales(t) = Val-
ueChain 3 Marketing&Sales(t − dt) + (Mar-
keting&Sales 3 Activity − Marginal Val-
ueAdded Marketing&Sales 3) * dt
Strat. Mgmt. J., 23: 417–434 (2002)

S32: ValueChain 3 Service(t) = ValueChain 3
Service(t − dt) + (Service 3 Activity −
Marginal ValueAdded Service 3) * dt
S33: Cumulative ValueAdded 3(t) = Cumula-
tive ValueAdded 3(t − dt) + (Marginal Val-
ueAdded InboundLogistics 3 + Marginal
ValueAdded Operations 3 + Marginal Val-
ueAdded OutboundLogistics 3 + Marginal
ValueAdded Service 3 + Marginal Value-
Added Marketing&Sales 3 − Cumulative
ValueAdded3 Flow 3) * dt
Flows
F35: Latent Demand3 = Latent Demand3 Low
Line * Latent Demand3 Convert
F36: Information Flow 3 = Latent Demand3 *
Channel 3 Trigger * Information Convert 3
F37: InboundLogistics 3 Activity = Price Correct
Orders3 * 0.15
F38: Marginal ValueAdded InboundLogistics 3 =
ValueChain 3 InboundLogistics
F39: Operations 3 Activity = Price Correct
Orders3 * 0.30
F40: Marginal ValueAdded Operations 3 = Val-
ueChain 3 Operations
F41: OutboundLogistics 3 Activity = Price Cor-
rect Orders3 * 0.05
F42: Marginal ValueAdded OutboundLogistics 3
= ValueChain 3 OutboundLogistics
F43: Marketing&Service 3 Activity = Price Cor-
rect Orders3 * 0.45
F44: Marginal Marketing&Sales 3 = ValueChain
3 Marketing&Sales
F45: Service 3 Activity = Price Correct Orders3
* 0.05
F46: Marginal ValueAdded Service 3 = Value-
Chain 3 Services
Auxiliary
A16: Channel 3 Trigger = IF (Information Stock
2) > 200, THEN (1); ELSE (0)
A17: Latent Demand3 Low Line(t) = Latent
Demand3 Low Line(t − dt) + (−Latent
Demand3) * dt
A18: Latent Demand3 Convert (See Appendix 2)
A19: Information Convert 3 (See Appendix 2)
A20: Unit Price Strategy 3 (See Appendix 2)
A21: Price Correct Orders 3 = Channel 3 Orders
* Unit Price Strategy 3
Copyright  2002 John Wiley & Sons, Ltd.
Value Creation in Fine Arts 433
APPENDIX 2: EXPLANATION OF
NONLINEAR TEMPORAL VALUES
USED IN THE MODEL
Convert Rates: These fractions simulate the three
groups of buyers. It is expected that some of each
of the groups is converted into actual consumers
of Boehm’s upper line products. The cognoscenti,
collector, and investor fractions have different
mathematical relationships over time, as the shapes
of the graphs illustrate.
Information Convert: These conversion rates
simulate how quickly or slowly the buyers in
each channel assimilate information about the true
demand for the three Boehm product lines, and
their decision and commitment to order products
from Boehm.
Unit Price Strategies: These strategies are the
company’s response to demand in terms of its
pricing strategies. For the simulation of the upper
line of products, the unit price begins at $20,000,
and the increments of increasing the price are
greater. The middle line of products is simulated
at prices beginning with $500. The strategy for
the lower line of products oscillates between $40
and $60.
Latent Demand Convert: For the middle line and
lower line of products, even without the existence
of an upper line of products where the buyers are
categorized as cognoscenti, investors, and collec-
tors, some homogeneous buyers would like to buy
Boehm products within a price range that they
consider affordable. Initially, this is an untapped
market in the simulation model. In other words,
they would not depend on the information trans-
ferred from the upper line of products. However,
the information cascade that occurs as upper line
products are made available and purchased stimu-
lates the latent middle line buyers to place orders
for a Boehm product that is designed for the mid-
dle line. The function over time ranges from 0
to 1. Once the middle line of products is intro-
duced, demand increases until the latent demand
has been converted into actual purchase orders and
the demand has been satisfied. A similar infor-
mation cascade occurs to affect the lower line of
products until that demand is satisfied also.
The graphs for the non-linear temporal relation-
ships are as follows:
Strat. Mgmt. J., 23: 417–434 (2002)
434 P. Crossland and f. l. smith

0.50 0.50
0.40 0.40
0.30 0.30
Series1 Series1
0.20 0.20
0.10 0.10
0.00 0.00
1
12
23
34
45

12
23
34
45
1
A2, Cognoscenti Convert Rate A4, Investor Convert Rate

0.50 1.50
0.40
0.30 1.00
Series1 Series1
0.20 0.50
0.10
0.00 0.00
12
23
34
45

12
23
34
45
1

1
A6, Collector Convert Rate A9, Information Convert 1

80000 1.50
60000 1.00
40000 Series1 Series1
0.50
20000
0 0.00
12
23
34
45

12
23
34
45
1

A10, Unit Price Strategy 1 A12, Latent Demand2 Convert

1.50 5000
4000
1.00 3000
Series1 Series1
0.50 2000
1000
0.00 0
12
23
34
45

12
23
34
45
1

A13, Information Convert 2 A14, Unit Price Strategy 2

1.50 1.50
1.00 1.00
Series1 Series1
0.50 0.50
0.00 0.00
12
23
34
45

10
19
28
37
46
1

A18, Latent Demand3 Convert A19, Information Convert 3

80
60
40 Series1
20
0
11
21
31
41
51
1

A20, Unit Price Strategy 3

Copyright  2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 23: 417–434 (2002)