Dynamics of Market Structure Driven by the Degree of Consumer’s RationalityI

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 bound-edly 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 con-sumers ’ utility but brings the minimum profit to the firms because of severe competition based on the moderate rationality of consumers