Role of Price in industry dynamics: A modular perspective

Abstract

In this paper, we present the most recent progress in agent-based modular economy, which places modularity as the center piece of the economic analysis. Our attempt is to show that the evolution of economy in terms of its structure of production and consumption activities can be built upon the concept of modularity. The modular economy begins with the modular production (modular commodity) and modular preference, and the algorithm to derive the utility of consuming a commodity by the given preference. The hierarchical modularity of preference is naturally susceptible to value-added and quality-based products, and can introduce an idea of increasing marginal utility in quality. On this basis, the evolution process of products can be generated by a competitive economy with profit-oriented firms. We then demonstrate some essential characteristics of this modular economy using a duopolistic competition. Specifically, we extend the simulation done by [3], which shows the superiority of a high mark-up strategy. However, in that study, the mark-up rate is fixed. In a more realistic setting, one should expect the firm will constantly change its mark-up rate in response to its competitor's position under the selection pressure. We, therefore, extend Chie and Chen's model by allowing the dynamically evolving mark-up rate, and then examine the role of price in duopolistic competition in which products are constantly evolving with the firms' R&D expenditure and investors are myopic in the sense their portfolios are mainly driven by firms' short-term profits.