A Model of Market Structure Dynamics with Boundedly Rational Agents
The main purpose of this paper is to investigate the time evolution of the market structure in order to understand how oligopoly and monopoly spontaneously emerge from competition among firms. To this end, the framework of mainstream (i.e., neo-classical) microeconomics is of no use because its paradigm is rigidly static and lacks the dynamical point of view in the true sense of the word. It basically supposes one-shot decision makings by economic agents. Even if intertemporal decision makings are considered, it is always assumed, in order to ensure the rationality of agents in an uncertain world, that agents know all the future information certainly, that agents knows the probability distribution of all the future states, or that agents know the true economic model and form rational expectations consistent with it. In other words, agents know the future states of the economy in advance at least on average. In this sense, it is obvious that the time structure collapses which the mainstream microeconomics premises. It deals with a world essentially without time and not with how a market economy evolves as time goes by. Studying the evolutionary process of a market economy does not make sense unless bounded rationality of agents is assumed. In this study, we investigate the time evolution of a competitive market, transforming from an initial state where there are many, boudedly rational firms into an oligopolistic or monopolistic state.
KeywordsMarket Share Firm Size Dominant Firm Detailed Balance Condition Rational Firm
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