Irrationality and monopolistic competition: An evolutionary approach
AbstractThis paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization. Specifically, this paper formulates a precise evolutionary dynamic model of an industry where there is continuous entry of firms that randomly select their output levels on entry and fix their output levels thereafter. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. This paper shows that the industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes infinitesimally small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 53 (2009)
Issue (Month): 5 (July)
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Web page: http://www.elsevier.com/locate/eer
Evolution Market selection Irrationality Monopolistic competition Natural selection;
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