An Evolutionary Simulation Model of the Effect of Innovation and Firm Dynamics on Market Power

An Evolutionary Simulation Model of the Effect of Innovation and Firm Dynamics on Market Power

Juan Luis Santos (Institute of Economic and Social Analysis, University of Alcalá, Alcalá de Henares, Spain), Tomás Mancha Navarro (University of Alcalá, Alcalá de Henares, Spain) and Federico Pablo-Martí (University of Alcalá, Alcalá de Henares, Spain)
Copyright: © 2016 |Pages: 19
DOI: 10.4018/IJABE.2016070103
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Abstract

This paper presents an agent-based simulation with the main insights from business theory to study firm growth and firm dynamics in a stochastic evolutionary model. Firm growth behavior and firm dynamics are defined according to the results of a panel data for a set of manufacturing markets for the Spanish economy. Then the effect of the economic growth on firm dynamics and subsequently the effect on market power are determined. The article shows that since the emergence of the current crisis three industrial sectors have increased business concentration. These three sectors were the ones with the highest concentration out of the five sectors studied. Product and process innovation are also included in the model and how they modify production and demand. The model presented also shows how firms adapt to changes in desired product characteristics and the effect of crisis on these dynamics.
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2. The Limitations Of Game Theory For The Analysis Of Firm Dynamics And The Needing Of Simulations

Industrial organization works make use of game theory as the main tool to analyze market dynamics (Belleflamme & Peitz, 2015). Although the results obtained with these techniques have been very successful in a number of scenarios, game theory makes necessary the incorporation of excessively restrictive assumptions that can affect the validity of the conclusions obtained (Aiginger & Finsinger, 2013).

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