Dynamics of market structure driven by the degree of consumer’s rationality

Tatsuo Yanagita and Tamotsu Onozaki

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 5, 1041-1054

Abstract: We study a simple model of market share dynamics with boundedly rational consumers and firms interacting with each other. As the number of consumers is large, we employ a statistical description to represent firms’ distribution of consumer share, which is characterized by a single parameter representing how rationally the mass of consumers pursue higher utility. As the boundedly rational firm does not know the shape of demand function it faces, it revises production and price so as to raise its profit with the aid of a simple reinforcement learning rule. Simulation results show that (1) three phases of market structure, i.e. the uniform share phase, the oligopolistic phase, and the monopolistic phase, appear depending upon how rational consumers are, and (2) in an oligopolistic phase, the market share distribution of firms follows Zipf’s law and the growth-rate distribution of firms follows Gibrat’s law, and (3) an oligopolistic phase is the best state of market in terms of consumers’ utility but brings the minimum profit to the firms because of severe competition based on the moderate rationality of consumers.

Keywords: Market share dynamics; Agent-based model; Bounded rationality; Zipf’s law; Gibrat’s law; Oligopoly (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:5:p:1041-1054

DOI: 10.1016/j.physa.2009.10.040

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