A Computational Model of Economies of Scale and Market Share Instability: A Replicator Dynamics Framework

Mariana Mazzucato - New York University

Replicator Dynamics and computer simulation techniques are used to construct a reduced form model which explores negative and positive feedback processes between firm unit costs and market shares in a homogeneous product industry. After reproducing the standard equilibrium results for decreasing returns to scale (unique equilibria) and increasing returns to scale (multiple equilibria), a more dynamic formulation of returns to scale is introduced where scale affects not the direction of costs but the rate of cost reduction (innovation). Here we find that negative feedback does not produce self-correcting stabililizing forces in market shares (as stressed by Arthur and David) but rather instability and turbulence. Life-cycle phenomena are explored by combining positive and negative feedback in a firm's cost function. The alternating periods of market share stability and instability which emerge from the simulations are compared to empirical regularities in market share patterns found in the US automobile and aircraft industries.

Scheduled for Session 2.3 Financial Models - III