Abstract
We propose an evolutionary model in which boundedly rational firms compete and learn in a dynamic oligopoly with imperfect information and evolving degrees of market power. Firms in the model set prices according to routines, and try to make profits by capturing market share. The model can be extended to deal with heterogeneous costs and technological advance. The demand side of the market is composed of boundedly rational consumers who are capable of adapting to changing market options. Supply-demand interactions can be represented through a population dynamics model from which prices and market structures emerge. We obtain closed-form and simulation results which we interpret and compare with benchmark results from a standard non-cooperative game (Bertrand). When we compare the results with the Bertrand setting, we find a surprising result. Whereas in the fully rational Bertrand setting, firms either lower prices and erode their extra profits, or try to cooperate in a collusive equilibrium that is detrimental for consumer welfare, in the evolutionary setting firms make substantial profits, compete by adjusting prices, and the dynamics improve consumer welfare. From these results we claim that, instead of treating market power, externalities, and asymmetric information as market failures, we should consider them as essential traits of market competition. We argue that neo-Schumpeterian models incorporate all of these features together, thus leading towards a more realistic price theory for market economies.
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Notes
Although, from an economic point of view, both routines are different, when analyzed mathematically we can see that the routine of equation (3) is the development of the first order Taylor series expansion (until the first derivative) of the routine of equation (2) taking αi = 1/ηi and, thus, the stability of the system will be the same whichever price routine is followed.
The graphical representation was carried out with pplane.m software developed by John C. Polking. For more information, see [Polking and Arnold, 2004].
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Acknowledgements
We would like to thank the participants at the 12th Jena Summer Academy on Innovation and Uncertainty Jena 2018 for their comments and suggestions on previous versions of this work. We gratefully acknowledge the detailed comments by Bernardo Caldarola, Uwe Cantner, Martin von Kalthausen, Ekaterina Prytova, and Simone Vannuccini. We also want to thank for their very valuable comments to two anonymous referees of the Journal of Evolutionary Economics.
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Almudi, I., Fatas-Villafranca, F., Palacio, J. et al. Pricing routines and industrial dynamics. J Evol Econ 30, 705–739 (2020). https://doi.org/10.1007/s00191-019-00645-8
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DOI: https://doi.org/10.1007/s00191-019-00645-8