This paper builds an evolutionary model of an industry where firms produce differentiated products. Firms have different average cost functions and different demand functions. Firms are assumed to be totally irrational in the sense that firms enter the industry regardless of the existence of profits; firms' outputs are randomly determined rather than generated from profit maximization problems; and firms exit the industry if their wealth is negative. It shows that without purposive profit maximization assumption, monopolistic competition still evolves in the long run. The only long run survivors are those that possess the most efficient technology, face the most favorable market conditions and produce at their profit maximizing outputs. This paper modifies and supports the classic argument for the derivation of monopolistic competition.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
15357.
Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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