System Fitness and the Extinction Patterns of Firms under Pure Economic Competition

P Ormerod; H Johns

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arXiv · cond-mat/0110052

System Fitness and the Extinction Patterns of Firms under Pure Economic Competition

P Ormerod·H Johns

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Abstract

The relationships which characterise the outcomes of the interactions between firms in the economy appear to follow power law behaviour. In particular, there is evidence that the empirical power laws which relate the size of an extinction to its frequency are similar for both biological species and firms in the economy .Biological species interact with each other in ways which either increase or decrease the fitness levels of individual species. In the same way, firms in the economy carry out strategies, and the net outcome of the interactions between firms is to increase or decrease the fitness of other firms.. Models which are used to describe the interactions of biological species can be given straightforward interpretations in terms of the interactions of firms in an industry. The general versions of models of interactions between agents allow for co-operative behaviour between pairs of agents. We contrast the properties of such a model with special cases of it, in which interactions are restricted so that only competitive interactions between pairs of agents are permitted. Such pure economic competition (PEC) behaviour is regarded as desirable by economic theory, The properties of the two models are strikingly different. A power law no longer provides a good description of the relationship between the size and frequency of extinctions in the PEC model, in which there are substantial numbers of very large extinctions. As a result, the level of fitness of the system as a whole remains considerably lower than in the general version of the model. This suggests that models of pure economic competition do not provide a good description of how many industries actually behave, and that a certain amount of collaboration and co-operation between firms is required for the survival of an industry.

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P Ormerod, H Johns. 2001-10-02. System Fitness and the Extinction Patterns of Firms under Pure Economic Competition. https://arxiv.org/abs/cond-mat/0110052

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