Co-Evolution of Firms and Consumers and the Implications for Market Dominance


Consider a setting in which firms randomly discover new ideas that affect their products or services and implement only those ideas that increase current profit. At the same time that firms are adapting their offerings, consumers are searching among firms for the best match. It is shown that implicit in these dual dynamics is an increasing returns mechanism which can result in one firm dominating the market in the long run. The conditions under which there is sustained market dominance are characterized.