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Nonequilibrium phase transitions in competitive markets caused by network effects

Author

Listed:
  • Andrew Lucas

    (a Department of Physics, University of Colorado Boulder, Boulder, CO 80309)

Abstract

In the conventional economic theory, competing sellers who maximize profit will all sell goods at the same price, making no profit. Network effects, defined by buyers assigning additional preference to popular sellers, destroy this ideal framework: some sellers spontaneously become more popular than others. Using models based on statistical physics, we predict network effects can also cause persistent dynamics in competitive markets, by driving the spontaneous formation of short-lived fads, with subsequent seller overpricing causing their collapse. This model exhibits both spontaneous price fluctuations and broad distributions of firm sizes, suggesting these empirically observed phenomena might have a common origin.

Suggested Citation

  • Andrew Lucas, 2022. "Nonequilibrium phase transitions in competitive markets caused by network effects," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 119(40), pages 2206702119-, October.
    • Handle: RePEc:nas:journl:v:119:y:2022:p:e2206702119
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