Simulation of structural changes at the sector level

Abstract

Contrary to AGE models which function within a competitive framework, our micro simulation model contains many elements which are related to a situation of imperfect competition. Most importantly, there are only a few, predominantly large, firms in each sector, which differ in technological and behavioural attributes. Products are differentiated and each firm acts as a price setter. The large simulated firms operate in a sheltered environment insofar as they only compete among themselves. The small residual firm is not an effective competitor, as it merely follows the price decisions of the large firms. However, our firms do not base their behaviour on an explicit recognition of oligopolistic interdependence, but rather learn gradually ‘what the market can bear’. Each firm is concerned with improving its profits, given its expectations on the market environment. The simulations reflect a gradual adaptation to demand and cost conditions, rather than an active rivalry among incumbent firms.