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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.

Suggested Citation

  • Luo, Guo Ying, 2009. "Irrationality and monopolistic competition: An evolutionary approach," European Economic Review, Elsevier, vol. 53(5), pages 512-526, July.
  • Handle: RePEc:eee:eecrev:v:53:y:2009:i:5:p:512-526
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    References listed on IDEAS

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    Cited by:

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    4. Marc Fleurbaey & Grégory Ponthière, 2021. "The stakeholder corporation and social welfare," Working Papers hal-03426120, HAL.

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