Marketing-induced demand generation and the evolution of market concentration

Abstract The current standard in agent-based economic modelling is effectively to conform to the technological view of the firm, wherein marginal costs play the central role. This is in contrast with the majority of theoretical research on business entities. The impact of marketing and demand-generation capabilities of firms has not been considered in quantitative theoretical frameworks. Moreover, competition and evolution of market shares has been most often modelled by the means of replicator dynamics. However, in its canonical form it is backward-looking, unaffected by any current variables; in a converse situation, the problem of ensuring mutual consistency of market shares changes arises. An alternative competition framework is proposed. An agent-based model is developed, in which firms are modelled as behavioural, contractual and procedural entities and their marketing affects the growth rate of demand. The proposed method of modelling firms' competition allows for representing markets with stationary, increasing, or decreasing concentration, with or without market leaders, and those composed of firms of similar size but transitioning to new stationary states of market concentration. It is demonstrated that the evolution of market concentration and the pace of marketing-enhanced demand growth depends on three factors: the size of possible market shares gains and losses per period, whether firms’ competitive power is related to their market share or not, and on the initial market composition. Moreover, enhancing demand growth is possible even in settings that are computational equivalents of perfectly competitive markets. JEL codes: D40, D90, L11, L22, M31