Four essays on evolutionary market share dynamics: A computational approach

The Dissertation uses evolutionary theory, non-linear dynamics and computer simulation techniques to explore the feedback between market structure and innovation.;Chapter I sets the stage by reviewing the connection between industry market structure, firm size, and innovation from a theoretical and an empirical point of view. The conclusion is that the non-linear and complex relationship between these variables, requires a theoretical framework which views variety between firms as a dynamic outcome of the competitive process, and a quantitative framework which can explore the complex non-linear dynamics.;Chapter II constructs a model which attempts to reproduce empirical patterns in firm size distributions, by embodying assumptions from different industry life-cycle studies on the relationship between firm size and innovation. The main conclusions are that: (a) depending on the parameter configuration, positive feedback between firm size and innovation can lead either to a competitive or to a monopolistic market structure, but with (final) firm ranking always predictable from knowledge of the initial efficiency levels; and (b) negative feedback instead leads to instability in market patterns and unpredictability in firm ranking. This result is of Particular interest since writings on multiple equilibria by Arthur (1989) have focused only on positive feedback. Chapter III repeats the same exercise but with a stochastic cost equation, which allows random idiosyncratic events to be included in a model of industry evolution. Here the conclusion is that although positive feedback between firm size and innovation still leads to a concentrated market structure, the process towards concentration is much more turbulent and ranking less predictable.;Chapter IV connects the issue of market share instability to the issue of stock price volatility. The model finds that the assumptions from the traditional "efficient market model" are not able to reproduce the empirical patterns in the relationship between stock prices and fundamentals. To better understand the "actual" relationship between market share instability and stock price volatility, a statistical analysis is performed on the data. The insights gained in Chapters II and III regarding the relationship between market share instability, market concentration, firm size and innovation, are used to interpret the empirical results.