Evolutionary Model of the Growth and Size of Firms

TL;DR

This paper presents an evolutionary model explaining the growth, size distribution, and dynamics of firms and products, integrating demand, supply, and competitive mechanisms to match empirical observations.

Contribution

It introduces a novel evolutionary framework deriving firm size distribution, growth rates, and other market properties from fundamental demand and competition principles.

Findings

Derives Gibrat's law from competitive dynamics.

Explains size-variance relationship in growth rates.

Predicts market invariants like profit-to-revenue ratio.

Abstract

The key idea of this model is that firms are the result of an evolutionary process. Based on demand and supply considerations the evolutionary model presented here derives explicitly Gibrat's law of proportionate effects as the result of the competition between products. Applying a preferential attachment mechanism for firms the theory allows to establish the size distribution of products and firms. Also established are the growth rate and price distribution of consumer goods. Taking into account the characteristic property of human activities to occur in bursts, the model allows also an explanation of the size-variance relationship of the growth rate distribution of products and firms. Further the product life cycle, the learning (experience) curve and the market size in terms of the mean number of firms that can survive in a market are derived. The model also suggests the existence of an invariant of a market as the ratio of total profit to total revenue. The relationship between a neo-classic and an evolutionary view of a market is discussed. The comparison with empirical investigations suggests that the theory is able to describe the main stylized facts concerning the size and growth of firms.