The development of the market structure of heterogeneous firms

Abstract

The article focuses on oligopolistic market which development is modeled with a simulation of firms operating in them. In our model, we take into account findings in theoretical and empirical research of the new trade theory, specifically – the heterogeneity of firms in terms of their productivity and product quality. In the model, firms are allowed to evaluate over the years taking yearly decisions regarding investment into the improvement of product quality and productivity. As a result of this modelling, the authors suggest that in the conditions of imperfect Bertrand competition, firms are not only affected by other firms and market structures in the market, but the firms themselves can act to their advantage changing the competitive environment and subsequently – market structure. Also, the model shows that firms with higher productivity and lower marginal costs do not pass on all the benefits of such savings to their buyers - they apply higher margins and earn higher profits. However, firms that end up winning over the market in the simulation model, lose incentives for further investment, especially in marginal cost-cutting innovations.