Growing Theories from the “Bottom up”. A Simple Entry-Exit Model

Abstract

This paper examines some complex dynamic behaviour emerging in a contestable market. We use nearly zero-intelligence firms: they all sell at a fixed price an equal quantity of the good; they enter and exit according to the lagged profitability of the market. The financial requirements of production are considered, and a spread between creditor and debtor interest rates is introduced. A deterministic case is studied, whose analytical solution shows the presence of infinite equilibria with respect to the number and average capitalisation of the firms. We then proceed in simulating an extended model with the ACE approach, allowing for heterogeneity of firms with respect to their equity, and idiosyncratic shocks on prices. Some other macrobehaviours emerge, among which an asymmetric distribution of firms’ equity base, phase transition in the volatility of the equity base time series, out of equilibrium persistence.