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Irrationality and monopolistic competition: An evolutionary approach

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  • Luo, Guo Ying

Abstract

This 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 Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 5 (July)
Pages: 512-526

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:5:p:512-526

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Evolution Market selection Irrationality Monopolistic competition Natural selection;

References

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  1. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
  2. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  3. Novshek, William., 1984. "On the Existence of Cournot Equilibrium," Working Papers 517, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Herings, P. Jean-Jacques & Peeters, Ronald & Schinkel, Maarten Pieter, 2005. "Intertemporal market division:: A case of alternating monopoly," European Economic Review, Elsevier, vol. 49(5), pages 1207-1223, July.
  5. Sidney Winter & Yuri Kaniovski & Giovanni Dosi, 2003. "A baseline model of industry evolution," Journal of Evolutionary Economics, Springer, vol. 13(4), pages 355-383, October.
  6. AMIR, Rabah & LAMBSON, Val, 2003. "Entry, exit, and imperfect competition in the long run," CORE Discussion Papers 2003066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  8. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: Special Results," Economic Journal, Royal Economic Society, vol. 95(380), pages 889-908, December.
  9. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  10. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  11. Robson, Arthur J, 1990. "Stackelberg and Marshall," American Economic Review, American Economic Association, vol. 80(1), pages 69-82, March.
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Cited by:
  1. Luo, Guo Ying, 2012. "Conservative traders, natural selection and market efficiency," Journal of Economic Theory, Elsevier, vol. 147(1), pages 310-335.

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