Increasing Returns to Scale, Dynamics of Industrial Structure and Size Distribution of Firm.pdf

1 Increasing Returns to Scale, Dynamics of Industrial Structure and Size Distribution of Firms? Ying Fan, Menghui Li, Zengru Di? Department of Systems Science, School of Management, Beijing Normal University, Beijing 100875, China _______________________________________________________________________ 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. JEL classification: L11, C61 Key words: Increasing returns, Industry dynamics, Size distribution of firms _______________________________________________________________________ . Ⅰ INTRODUCTION In the past decades, the evolutionary perspective has contributed lot to the economics (Arthur, Durlauf, and Lane, 1997; Dosi, Nelson, 1994; Aruka, 2001). The economy is studied as an evolving complex system with many features in complexity such as nonlinear interactions and emergent properties. In reality, the economic system consists ? The paper has been presented in the 1st Sino-German workshop on the evolutionary economics, March, 2004, Beijing, China. The authors thank all the participants for their helpful comments and suggestions. The work is supported by the NSFC under the grant No.an