Monopoly and oligopoly led by an invisible hand

Abstract

A simple virtual market economy is simulated, and the emergence of monopoly or oligopoly as a result of competition is shown, which traditional microeconomics fails to explain because it essentially lacks a dynamical structure. The model contains many consumers and producers, who are boundedly rational in the sense that they face the information limit and cannot calculate the optimum consumption or production. Therefore, they behave habitually or adaptively. Only a single commodity is produced and purchased, but there is the product differentiation that is described in the form of a consumer's habituation. A consumer has her favorite product and she always compares its price with a price of another product. She purchases her favorite commodity unless its price is too much higher than another's. A producer produces and sets a price on commodities so as to chase higher profit, not to maximize them. This profit-chasing behavior is described with the aid of the hill-climbing method: a producer revises his production and price to the direction where profit becomes higher. Monopoly or oligopoly emerges according to two key parameters, i.e., the robustness of the consumer's habit and the inertia of the producer's revision.