Evolution and Market Competition

40 Pages Posted: 14 May 2009 Last revised: 26 May 2009

Abstract

Profit maximization is the usual prerequisite for achievement of a perfectly competitive equilibrium. However, for a long time it has been thought that this principle of profit maximization can be replaced by natural selection. This paper shows analytically that with the market selection criterion of making non-negative wealth and with firms behaving totally irrationally the industry evolves and converges in probability to a perfectly competitive equilibrium as the firms get infinitesimally small relative to the market, as the entry fixed costs get sufficiently small and as time gets sufficiently large. This is accomplished by following the evolution of an industry through an infinite time horizon model where firms' outputs are chosen randomly by nature, entry occurs with no motivation and exit occurs when a firm's wealth becomes negative.

Keywords: Evolution, perfect competition, irrationality, profit maximizing behavior, natural selection, market selection

JEL Classification: D21, D41, L10

Suggested Citation

Luo, Guo Ying, Evolution and Market Competition. Journal of Economic Theory, Vol. 67, 1995. Available at SSRN: https://ssrn.com/abstract=1404175

Guo Ying Luo (Contact Author)

McMaster University

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905 525 9140 ext. 23983 (Phone)

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