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Natural Selection, Irrationality and Monopolistic Competition

  • Luo, Guo Ying

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.

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Date of creation: May 2009
Date of revision:
Handle: RePEc:pra:mprapa:15357
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  1. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  2. Lawrence E. Blume & David Easley, 1998. "Optimality and Natural Selection in Markets," Working Papers 98-09-082, Santa Fe Institute.
  3. 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.
  4. Luo Guo Ying, 1995. "Evolution and Market Competition," Journal of Economic Theory, Elsevier, vol. 67(1), pages 223-250, October.
  5. Robson, Arthur J, 1990. "Stackelberg and Marshall," American Economic Review, American Economic Association, vol. 80(1), pages 69-82, March.
  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. Prajit K. Dutta & Roy Radner, 1999. "Profit Maximization and the Market Selection Hypothesis," Review of Economic Studies, Oxford University Press, vol. 66(4), pages 769-798.
  8. William Novshek, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 85-98.
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