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Natural Selection, Irrationality and Monopolistic Competition

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  • Luo, Guo Ying

Abstract

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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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15357.

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Date of creation: May 2009
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Handle: RePEc:pra:mprapa:15357

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Related research

Keywords: Evolution; Natural Selection; Irrationality; Monopolistic Competition; Survival of the Fittest; Market Rationality;

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  1. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 85-98, January.
  2. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Robson, Arthur J, 1990. "Stackelberg and Marshall," American Economic Review, American Economic Association, vol. 80(1), pages 69-82, March.
  4. Lawrence E. Blume & David Easley, 1997. "Optimality and Natural Selection in Markets," GE, Growth, Math methods 9712003, EconWPA, revised 09 Jul 1998.
  5. Dutta, Prajit K & Radner, Roy, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 769-98, October.
  6. Arrow, Kenneth J, 1986. "Rationality of Self and Others in an Economic System," The Journal of Business, University of Chicago Press, vol. 59(4), pages S385-99, October.
  7. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  8. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
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