Evolution, Irrationality, and Monopolistically Competitive Equilibrium

Guo Ying Luo ()
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Guo Ying Luo: McMaster University

Chapter Chapter 3 in Evolutionary Foundations of Equilibria in Irrational Markets, 2012, pp 33-59 from Springer

Abstract: Abstract The chapter presents an evolutionary model of a product differentiated industry and proves that the monopolistically competitive equilibrium will arrive as a long run outcome even though firms are totally irrational. In this evolutionary model, firms are 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. The model concludes that the industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes sufficiently small, as entry costs become sufficiently small and as time gets sufficiently large. The firms that remain in the industry in the long run are those producing output at the tangency of the demand curve to the average cost curve. Furthermore, in the long run, no potential entrant can make a positive profit by entry.

Keywords: Demand Curve; Average Cost; Competitive Equilibrium; Entry Barrier; Entry Cost (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:spr:steccp:978-1-4614-0712-6_3

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DOI: 10.1007/978-1-4614-0712-6_3

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