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Complexity Considerations and Market Behavior

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  • Fershtman, Chaim
  • Kalai, Ehud

Abstract

The paper is concerned with market behavior when firms have limited ability to handle effectively the complexity of changing market conditions and strategic interaction. Modelling the managerial bounded rationality by using the concept of strategic complexity as measured by finite automaton, we altered once there show that market behavior can be considerably is a limit on the complexity of strategies. In particular the paper demonstrates that when an incumbent firm operates in several markets an entry to one market may induce the incumbent to exit from another market (divestiture) in order to "concentrate" on the competition it faces. For different parameters the incumbent may react to such an entry by exit from the same market creating specialization. The paper also demonstrates that bounded complexity can serve as an entry barrier giving an advantage to the established incumbent firm.

Suggested Citation

  • Fershtman, Chaim & Kalai, Ehud, 1991. "Complexity Considerations and Market Behavior," Foerder Institute for Economic Research Working Papers 275506, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275506
    DOI: 10.22004/ag.econ.275506
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    File URL: https://ageconsearch.umn.edu/record/275506/files/TEL-AVIV-FSWP-176.pdf
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    References listed on IDEAS

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    Financial Economics; Marketing;

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