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Irrationality and monopolistic competition: An evolutionary approach

  • Luo, Guo Ying

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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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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  1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
  2. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  3. William Novshek, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 85-98.
  4. Rabah Amir & Val E. Lambson, 2003. "Entry, Exit, and Imperfect Competition in the Long Run," CIE Discussion Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  5. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  6. Sidney G. Winter & Yuri M. Kaniovski & Giovanni Dosi, 2003. "A Baseline Model of Industry Evolution," LEM Papers Series 2003/12, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  7. Robson, Arthur J, 1990. "Stackelberg and Marshall," American Economic Review, American Economic Association, vol. 80(1), pages 69-82, March.
  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. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  10. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
  11. 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.
  12. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
  13. 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.
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