Monopoly, oligopoly and the Invisible Hand

We investigate the time evolution of the market structure, employing a discrete-time, nonlinear model characterized by agents with bounded rationality and product differentiation. By bounded rationality we mean that agents only have partial information: each firm does not know the demand function, so that it revises production decisions and prices so as to raise its profit based on the reaction by consumers. In this sense producers behave adaptively. We further assume product differentiation: each consumer has a preference for the product of a particular firm and exhibits habitual purchasing behavior unless price differences exceed a certain critical level. Simulation results show that monopoly and oligopoly emerges out of competitive situations as the key parameter of consumer’s inertia increases.