ABSTRACT
Traditionally, firm competition has been studied in contexts where the dimensionality of the product attribute space is given, and firms deploy their strategies constrained by this space. However, firms may exert influence on the local structure of the product attribute space by offering product variants with new attributes. As a result, the geometry of the product attribute space would change endogenously through firms' actions, and this emergent new geometry modifies the conditions for subsequent firm behavior. By focusing on this interplay between actors and conditions, we explore the co-evolution of the firm and the product attribute space. Through a multi-variant Cournot competition framework, we develop a computational model in which firms invest to differentiate their products from other variants, but as minimally as possible so that demand from closely similar existing variants can be stolen. We introduce the fraction dimensionality of the attribute space as our critical independent variable, to reflect saturation of the space with product varieties. The simulation reveals that while new product variants are typically introduced by firms with scale economies, their performance gap with firms without scale economies reduces as fraction dimensionality increases. This indicates that space geometry evolution may favor small-scale players, even when their large-scale competitors are the driving force behind attribute space changes.
ABSTRACT
This paper provides a micro-foundation for dual market structure formation through partitioning processes in marketplaces by developing a computational model of interacting economic agents. We propose an agent-based modeling approach, where firms are adaptive and profit-seeking agents entering into and exiting from the market according to their (lack of) profitability. Our firms are characterized by large and small sunk costs, respectively. They locate their offerings along a unimodal demand distribution over a one-dimensional product variety, with the distribution peak constituting the center and the tails standing for the peripheries. We found that large firms may first advance toward the most abundant demand spot, the market center, and release peripheral positions as predicted by extant dual market explanations. However, we also observed that large firms may then move back toward the market fringes to reduce competitive niche overlap in the center, triggering nonlinear resource occupation behavior. Novel results indicate that resource release dynamics depend on firm-level adaptive capabilities, and that a minimum scale of production for low sunk cost firms is key to the formation of the dual structure.
