Innovation and the demand for food and drug labelling regulation in an evolutionary model of industry dynamics

Product innovation is examined in the context of an evolutionary model of industry and market behaviour in which a new product with a cost advantage and an unobservable, adverse characteristic competes with an existing product. Absent regulatory responses that ensure credible labelling, markets converge to steady state equilibria in which only the new product is traded. With credible labelling, the markets for the commodities become segmented. Welfare effects for consumers depend on the distribution of labelling ‘property rights’ between new and old product firms, market access, the cost advantage of the new product, and the magnitude of labelling costs     

Appropriate contract durations in the German markets for on-line reserve capacity

This paper explores the economic implications of different contract durations in markets for on-line (primary and secondary) reserve capacity in Germany with the crucial feature of separate markets for spot energy and reserve capacity provision. The analysis is based on an equilibrium model developed by Just and Weber (Energy Econo 30:3198–3221, 2008) for reserve markets. It reveals the implicit trade-off for the bidders and implicit interdependencies between the reserve and the spot markets. Even if the markets are not explicitly coordinated, they are interrelated through the dispatch decisions of the power plant owners. The paper concludes that the current German reserve market design is inefficient and should be improved. The results clearly show that shorter periods (with resulting lower variations in overall electricity demand) lead to more efficient dispatch and market results. Not only prices in the reserve capacity markets are expected to be lower, but also spot market prices. As these benefits can be partially reaped by owners of large generation portfolios also under longer contract durations, it discriminates against smaller generation companies and can potentially deter market participation. Further, the paper takes a broader perspective and discusses security concerns against shorter contract durations. It is shown that the opportunity costs character of the reserve market implies sufficient incentives for supplying online reserve capacity. The concerns do not appear to be predominant and it should be possible to manage them appropriately.     

The evolution of debt and equity markets in economic development

Summary. As noted by Gurley and Shaw, there is a typical pattern of economic development in which the evolution of the financial system is an essential aspect of the growth process. We focus on one component of this evolution: the increasing importance of equity markets as an economy grows. We develop a growth model where capital accumulation is financed externally through a combination of debt and equity. We illustrate why equity market activity might grow – often very rapidly – as an economy develops. We also illustrate why access to equity markets may not be needed in the early stages of economic development. Received: December 30, 1997; revised version: May 26, 1998     

Market design for standardization problems with agent-based social simulation

This paper provides a computational market model with technological competitions among standards and presents simulations of various scenarios concerning standardization problems. The market model has three features: (1) economic entities such as consumers and firms are regarded as autonomous agents; (2) micro interactions among consumer agents or firm agents have essential mechanisms interpretable in real markets; and (3) consumers’ preferences and firms’ technologies co-affect their evolutionary behavior. In recent years, consumers have experienced various inconveniences from de facto competition based on a market mechanism. Standardization communities or committees such as the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) need to design a compatible standard or a de jure standard in a market. However, it is difficult for market designers to decide a method or timing for the standardization. Here, by introducing a novel technique used in agent-based social simulation (ABSS), which we call “scenario analysis,” we aim to support such decision making. Scenario analysis provides the possible market changes that can occur following implementation of a design policy under a specific market situation and the market mechanisms that generate these market changes.     

Evolutionary choice of markets

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the markets may differ in the liquidity they provide. Traders have idiosyncratic preferences for the markets, e.g.due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that no trade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. By contrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds to the equilibrium with two active markets and coincides with the welfare maximizing market structure. We are grateful to Thorsten Hens, Fernando Vega-Redondo and a referee for valuable comments. We also thank seminar participants at the University of Zurich, the CES research seminar at the University of Munich, the Koc University in Istanbul as well as conference participants at the SAET conference in Ischia, the ESEM in Lausanne and the ESF workshop on Behavioural Models in Economics and Finance in Vienna. A first version of the paper was written while Marc Oliver Bettzüge was visiting the Institute for Empirical Research in Economics at the University of Zurich. Financial Support by the Swiss Banking Institute and by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged. The NCCR FINRISK is a research program supported by the Swiss National Science Foundation.     

Don’t blame the P2P file-sharers: the impact of free music downloads on the purchase of music CDs in Canada

This study measures the extent to which P2P file-sharing activities act as substitutes or complements to music purchases in markets for CDs. The paper breaks with the mainstream economics approach which dominates the music file-sharing discussion. Whereas such models assume relationships at the micro level (e.g. between file-sharing and purchases) based on observations made at the macro level, our evolutionary economics approach measures the direct effects using micro data representative of the Canadian population. The behavioral incentives underpinning free music downloading, novel to this paper, are the multiple effects of: ‘unwillingness to pay’ (market substitution), ‘hear before buying’ (market creation), ‘not wanting to buy a whole album’ (market segmentation), and ‘not available in the CD format or on electronic pay-sites’ (market creation). Although the two first mentioned incentives significantly influence CD album purchases—i.e. there is a negative and significant market substitution effect and a positive and significant market creation effect—on the whole, these two effects ‘cancel’ one another out, leading to no association between the number of P2P files downloaded and CD album sales.     

The value of delays: market- and policy-induced adjustment processes as a motivating factor in dynamic entrepreneurship

Reaching societal consensus on how to deal with new issues, e.g. agreeing on commercial law for e-commerce, takes time. Traditional economics has considered such anomalies as market imperfections. By contrast, this paper suggests perceiving such “delays” as windows of opportunity for entrepreneurs. These considerations from evolutionary economics and entrepreneurship will be explored in a case study on disease management services in Germany. It will become clear that detailed ex ante legal regulation restricts entrepreneurial room for variation. To avoid this loss of knowledge generation, the government should abstain from introducing such premature intervention without having to challenge existing meta-rules.     

民营上市公司治理存在的问题与对策

随着公司在数量上的日益增长,建立完善的资本市场已迫在眉睫。上市公司组成了资本市场,资本市场与上市公司的发展紧密相关,而公司治理则决定了上市公司的发展,如何治理好公司对发展资本市场至关重要。民营公司是市场经济发展的生力军,是国民经济的重要组成部分。文章针对我国民营上市公司治理存在的问题进行了分析,并提出了相应的对策建议。     

Global financial crisis as a phenomenon of stock market overshooting

Inspired by Dornbusch’s model of exchange rate overshooting we develop a theory of stock market behaviour and its impact on the real economy. The idea is that stock market prices overshoot and undershoot their long-run equilibrium values which are determined by the development in the real economy. The overshooting is triggered primarily by a loose monetary policy. With our model we explain the genesis of the global financial crisis (GFC) 2008/2009 primarily as the result of a loose monetary policy in the USA. Following the overshooting and crash in the stock market the real economy dropped into a recession. After modelling the interaction of three markets with different speed of adjustment—money, stocks and goods—for a closed economy we expand it to an open economy and lastly study the spillovers of a financial market crisis between countries (from a large to a small country) by introducing the transmission channels of external trade or cross-border financial transactions. A long-lasting monetary easing as exhibiting by the Fed and the ECB since 2007 and 2008, respectively could—according to our model—generate another boom-bust cycle.     

Competitive behavior in market games: Evidence and theory

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1973) [21]. Market games obtain Pareto inferior (strict) Nash equilibria, in which some or possibly all markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated competitive equilibrium of the underlying economy. Motivated by these findings, we provide a theoretical argument for why evolutionary forces can lead to competitive outcomes in market games.     

A close eye on the invisible hand

The paper shows how, and under what minimal information supply conditions, a market finds its competitive equilibrium price and thus solves the so-called tatonnement process, without sellers and buyers knowing the equilibrium price in advance. The information premises must be understood as a basic first approach, and do not necessarily mimic the real market process. Demonstration of a discovery process under these information handling conditions is an important finding for an evolutionary market theory. Additional information-processing elements should augment the efficiency of the discovery process. The results of the simulated market process set out above raise new questions. The role of institutional elements (such as the relevance of demand flexibility or “certainty” of knowledge in the learning process, etc.) is discussed further outside the context of the simulation model, providing new insight into the market process.     

The Narrow and Broad Approaches to Evolutionary Modeling in Economics

Some models in evolutionary economics rely on direct analogies to genetic evolution, assuming a population of firms with routines, technologies, and strategies on which forces of diversity generation and selection act. This narrow conception can build upon previous findings from evolutionary biology. Broader concepts of evolution allow many or just one adaptive entity, instead of necessarily requiring a population. Thus, an institution or a society can also be understood as an evolutionary entity. Both the narrow and broad approaches have been extensively used in the literature, albeit in different literature traditions. I provide an overview of the conception and development of both approaches to evolutionary modeling, and argue that a generalization is needed to realize the full potential of evolutionary modeling.     

Equilibrium in Auction and Bargaining Markets When Agents Can Wait and Search

The paper studies two market structures and two modes of trade. The agents, buyers and sellers, can choose whether to stay or search. The meetings take place randomly, and trades are consummated by auction or by bargaining. There are altogether four possible markets but in equilibrium at most two markets are active simultaneously. There is almost always a unique evolutionary stable equilibrium which consists of an auction market when the numbers of buyers and sellers differ greatly, and two simultaneous auction markets when the numbers are relatively close.     

Complexity and the limits to learning

In this paper we look at the manner in which ideas coming from complexity science change our understanding of the cognitive powers of agents that is really necessary to explain the evolution of markets and of firms. The general ideas behind complex systems dynamics and evolution are presented and then two examples are treated in detail. The first in an evolutionary model of a market in which some new product is developed by competing firms and their “task” is to find a strategy in terms of quality and price that will be sustainable. This essentially requires agents/firms to discover mutually compatible strategies, and to create thereby sustainable market niches. The second example considers the internal structure of firms, in terms of their constituent working practices and skills. It demonstrates that it is precisely their ignorance of the consequences of adopting any particular practice that generates diversity in the emergent capabilities of firms, exploring the dimension of potential demand and therefore leading to a successful and sustainable business sector. The work supports the notion that the cognitive abilities that are involved are not about deduction and logic, as a traditional view of rationality might suggest, but are about the development and contraction of interpretive frameworks, which will be different for each player. The paper links these examples to a general recognition of the idea that complex, multi-agent systems evolve through successive “structural attractors”—multi-dimensional dynamical systems—with temporary structural stability. Because real systems contain both the structure and deviations from it, then there is a constant probing of structural stability and the possibility of qualitative change to a new structural attractor. This resembles the ideas in biological evolution related to “punctuated equilibria,” but it also links this to the idea of emergent and evolving networks of interaction, never of course near thermodynamic equilibrium.      

On the genesis of multinational foreign affiliate networks

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks.     

Allowing communities to trade in imperfectly competitive pollution-permit markets

Citizens and organizations representing them play an increasingly important role in markets for environmental quality, but much remains to be learned about how their participation affects these markets. We analyze the effects of allowing a community of citizens to trade pollution permits in an imperfectly competitive permit market. Allowing the community to trade directly reveals its preferences, which enhances welfare. However, community participation may also exacerbate distortions due to market power, even though the community itself trades competitively. Including the community in permit distribution may exacerbate market power distortions by affecting a dominant trader’s propensity to participate in the permit market. Second, the community’s demand/supply for permits may be more inelastic than other traders and worsen distortions due to market power. We illustrate in an example that these negative effects on competition can dominate the positive effect from preference revelation through the market place.      

The ‘science-as-market’ analogy: a constitutional economics perspective

The ‘science-as-market’ analogy has been used in support of the notion that in science just as in markets competition works as an effective instrument for reconciling the self-interested ambitions of individual agents with the social function that science and markets are supposed to serve. This paper examines the analogy from a constitutional economics perspective, drawing attention to the role that the rules of the constitution of the ‘game of science’ as well as the ‘market game’ play in conditioning the ways in which competition works in the two realms.     

Effective monitoring and mitigation in the organized wholesale electric power markets

The organized wholesale electric power markets in the United States are characterized by structural market power, and would not produce competitive results absent administrative intervention. Market power mitigation is a fundamental and permanent part of the market design for the organized wholesale electricity markets. Market power mitigation is essential to FERC’s policy of relying on competition to regulate electric wholesale power prices, consistent with its mandate under the Federal Power Act. Controversy has arisen about how to ensure that the markets clear on the basis of offers that have been determined to be competitive. Specifically, the issue is what institution and function is best situated to provide the initial critical determination about whether a participant’s offer is competitive. Despite recent clarification of FERC policies on the market monitoring function, the roles of market administrators and market monitors are a potential source of confusion and counterproductive institutional conflict. The FERC should refine and clarify its policy in this area by according exclusive responsibility to institutional, independent market monitors to monitor participants’ conduct and the potential for the exercise of market power through ex ante review of cost-based offers used in market power mitigation, subject to review by FERC.     

An experimental analysis of the effects of automated mitigation procedures on investment and prices in wholesale electricity markets

In this paper we report the findings of an economic experiment that examines the effects of an automated mitigation procedure (AMP) on prices and capacity investment choices of suppliers in a wholesale electricity market. Specifically, we examine the effects of different market power incentives on markets with and without an AMP. While we find that the AMP does not affect overall investment in capacity, the most significant determinant of long-run prices is investment in new capacity. The AMP also does not reduce long-run prices relative to markets without an AMP. Furthermore, our participants successfully manipulated the AMP’s trigger price. The data and a sample copy of the instructions are available upon request. This article reflects the opinions of the authors and does not necessarily reflect the position of the Federal Energy Regulatory Commission or any individual Commissioner.     

A concentration index for differentiated products: the case of religious competition

In the past, scholars have used a Herfindahl–Hirschman Index using denominational market shares to measure the competitiveness of religious markets. However, this approach ignores both the imperfect substitutability between denominations and the degree of competition within denominations. These two shortcomings make the current index a suspect measure of religious competition; it often falsely identifies which market micro-economists would generally consider the more competitive one. We develop a new religious competition index that incorporates intra-denominational competition and creates a ‘substitutability parameter’ to better specify the appropriate degree of inter-denominational competition. While the model developed in this article applies specifically to religious markets, our index of competition could be expanded to other economic markets where such a substitutability parameter is meaningful.