Consumer social learning and industrial dynamics

Abstract

ABSTRACTIn this paper, we propose an agent-based model in which industrial dynamics depend on consumer social learning and firm innovation efforts. We draw on behavioral economics and consumer psychology to model consumer learning as a process of social adaptation-cum-individual novelties which operates within a stochastic dynamic network. In our model, consumers create original patterns of behavior, but they also imitate similar others through a (degree-dependent) influence-biased process of change. Likewise, consumer behavior is shaped by firms which attempt to capture larger market shares. Thus, we propose a model in which consumers update their position (tastes) in a product characteristics space through innovation and adaptation, and co-evolve with profit-seeking firms which observe and shape evolving consumer behavior. We simulate the resulting market process obtaining trajectories and stationary states for the degree of industrial concentration, the number of producers, and certain features of the industry lifecycle.The analysis of the model reveals how three demand parameters – consumer ‘insistence’ (capturing inertia in decision-making), the ‘locality’ of consumer learning, and consumer ‘loyalty’ to firms – affect industry evolution. Likewise, the model generates a continuum of limit industrial structures – from perfect competition, to oligopolies or monopolies – with said demand parameters influencing the stationary states.