Non-Price Competition in a Modular Economy. An Agent-Based Computational Model

While it has been well acknowledged by economists for a long time that competition is not justabout price, the conventional quantity-based economic models have had difficulties integrating price competitionand quality competition into a coherent framework. In this paper, motivated by Herbert Simon'sview of near decomposability or modularity, we propose a quality-based economic model called the modulareconomy. In this modular economy, quality is manifested by the evolutionary design of more sophisticatedand customized products that can satisfy consumers' satisfaction to a higher degree. Two essentialfeatures of the modular economy are founded through the agent-based simulation of a duopolistic competition.First, market competition tends to be self-annihilating; the competition will eventually end up witha dominant or a monopoly firm (conglomerate). Second, the high-markup firm has a better chance to bethe only survivor than its low-markup competitor. We analyze these features through the complex cyclicaldynamics of prices, profits, dividends, investment, working capital, and quality.