Increasing Returns to Scale, Dynamics of Industrial Structure and Size Distribution of Firms

TL;DR

This paper presents a dynamic model illustrating how increasing returns to scale influence industrial structure, firm size distribution, and market evolution, aligning with empirical observations and emphasizing the roles of self-reinforcement, adaptive strategies, and demand heterogeneity.

Contribution

It introduces a generalized model capturing the effects of increasing returns on industry dynamics and firm size distribution, integrating demand diversity and adaptive growth strategies.

Findings

Reproduces power-law distribution of firm sizes

Aligns with empirical stylized facts of industrial evolution

Highlights key factors like self-reinforcement and demand heterogeneity

Abstract

A model is presented of the market dynamics to emphasis the effects of increasing returns to scale, including the description of the born and death of the adaptive producers. The evolution of market structure and its behavior with the technological shocks are discussed. Its dynamics is in good agreement with some empirical stylized facts of industrial evolution. Together with the diversities of demand and adaptive growth strategies of firms, the generalized model has reproduced the power-law distribution of firm size. Three factors mainly determine the competitive dynamics and the skewed size distributions of firms: 1. Self-reinforcing mechanism; 2. Adaptive firm grows strategies; 3. Demand diversities or widespread heterogeneity in the technological capabilities of different firms. Key words: Econophysics, Increasing returns, Industry dynamics, Size distribution of firms