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Evolution, Irrationality, and Monopolistically Competitive Equilibrium

In: Evolutionary Foundations of Equilibria in Irrational Markets

Author

Listed:
  • Guo Ying Luo

    (McMaster University)

Abstract

The chapter presents an evolutionary model of a product differentiated industry and proves that the monopolistically competitive equilibrium will arrive as a long run outcome even though firms are totally irrational. In this evolutionary model, firms are 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. The model concludes that the industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes sufficiently small, as entry costs become sufficiently small and as time gets sufficiently large. The firms that remain in the industry in the long run are those producing output at the tangency of the demand curve to the average cost curve. Furthermore, in the long run, no potential entrant can make a positive profit by entry.

Suggested Citation

  • Guo Ying Luo, 2012. "Evolution, Irrationality, and Monopolistically Competitive Equilibrium," Studies in Economic Theory, in: Evolutionary Foundations of Equilibria in Irrational Markets, chapter 0, pages 33-59, Springer.
    • Handle: RePEc:spr:steccp:978-1-4614-0712-6_3
    DOI: 10.1007/978-1-4614-0712-6_3
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