Table Of ContentMicroeconomics of Interactive Economies
For my wife Angelika,
who gave so much for this book.
W.E.
(cid:3)
Microeconomics
of Interactive Economies
Evolutionary, Institutional, and Complexity
Perspectives
A ‘Non-Toxic’ Intermediate Textbook
(cid:120) Interdependencies & Complexity
(cid:120) Uncertainty, Search & Learning
(cid:120) Interaction & Cumulative Process
(cid:120) Evolutionary Process & Multiple Equilibria
(cid:120) Coordination & Cooperation
(cid:120) Institutions, Rules & Routines
(cid:120) Real-World Markets: Firm Size & Power, Oligopoly & Monopolistic
Competition
(cid:120) Neoclassical ‘Perfect Markets’ and Their Critique
(cid:120) Modern Core Models of Complexity Economics
(cid:120) The Universe of Economic Forms and Dynamics
(cid:120) Game Theory and Simulation Methods
Wolfram Elsner
Professor of Economics, iino – Institute for Institutional and
Innovation Economics, Faculty of Business Studies and
Economics, University of Bremen, Germany
In collaboration with Torsten Heinrich, Henning Schwardt, and
Matthias Greiff
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Wolfram Elsner 2012
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic, mechanical
or photocopying, recording, or otherwise without the prior permission of the
publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2012938049
ISBN 978 1 84064 522 4 (cased)
978 1 78100 903 1 (paperback)
Printed and bound by MPG Books Group, UK
2
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Overview
Contents vii
List of Figures xiii
List of Tables xv
Preface – Microeconomics in Times of Crisis: A ‘Post-2008’ xvii
Textbook, its Aims and Scope
Didactics – How to Work with this Textbook xxiii
1. Introduction to the Microeconomics of Interactive Economies 1
2. Methods for Analyzing Interactive Economies: An Introduction to 18
Game Theory
3. Problem Structures and Processes of Interactive Economies 48
4. Real-World Markets: Hierarchy, Size, Power, and Direct 70
Interdependence
5. Ideal Neoclassical Market and General Equilibrium 98
6. Critique of the Neoclassical ‘Perfect Market’ Economy and 125
Alternative Price Theories
7. Methods for Analyzing Complex Processes: An Introduction to 143
Computer Simulation
8. Recent Core Models of Complexity Microeconomics 154
9. A Universe of Economies: Interdependence and Complexity, 190
System Trajectories, Chaos, and Self-Organization
References 227
Name Index 234
Subject Index 235
v
Contents
List of Figures xiii
List of Tables xv
Preface – Microeconomics in Times of Crisis: A ‘Post-2008’ xvii
Textbook, its Aims and Scope
Didactics – How to Work with this Textbook xxiii
1. Introduction to the Microeconomics of Interactive Economies 1
1.1 Different Problem Structures in Interdependent Social 1
Situations
1.2 Competing Paradigms in Economics: Invisible Hand vs. 3
Fallacy of Aggregation
1.3 Uncertainty, Strategic Uncertainty, and Bounded Rationality 5
1.4 Path Dependence and Non-Ergodicity in Processes of Change 7
1.5 Social Rules and Social Institutions as Informational Devices 8
1.6 Social Rules and Social Institutions as Solutions to 9
Coordination and Dilemma Problems
1.7 Public Good Character and Positive External Effects of Social 12
Rules and Social Institutions
1.8 Instrumental and Ceremonial Dimensions of Social 14
Institutions
1.9 Real-World Microeconomics 15
2. Methods for Analyzing Interactive Economies: An Introduction to 18
Game Theory
2.1 Introduction 18
2.2 Formal Concepts 19
2.2.1 Invisible Hand and Fallacy of Aggregation again 19
2.2.2 Games 21
2.2.3 Agents and Decision Making 23
2.3 Solutions of Normal Form Games 24
2.3.1 Dominance of Strategies 24
2.3.2 Nash Equilibrium 26
vii
viii Contents
2.3.3 Mixed Strategies 28
2.3.4 Nash Equilibrium in Mixed Strategies 29
2.4 Repeated Games 32
2.5 Population Perspectives and Evolutionary Games 35
2.5.1 Evolutionary Approaches to Game Theory 35
2.5.2 Evolutionary Stability 37
2.5.3 Replicator Dynamics 41
2.6 Rationality in Game Theory 46
2.7 Conclusions 46
3. Problem Structures and Processes of Interactive Economies 48
3.1 A Continuum of Social Problem Structures 48
3.2 Solutions to Social Dilemma Problems 54
3.2.1 Transformation of the Problem Structure: Supergames 55
and Single-Shot Solution
3.2.2 The Population Perspective 60
3.2.3 Agency Mechanisms 62
3.2.4 Institutionalization of Cooperative Behavior 64
3.3 An Inefficient Equilibrium: The Hawk-Dove Game in an 68
Evolutionary Perspective
4. Real-World Markets: Hierarchy, Size, Power, and Direct 70
Interdependence
4.1 Real-World Phenomena and the Global Corporate Economy 70
4.2 Factors Explaining Size, Power, and a Small Number of 72
Interdependent Suppliers
4.3 Pure Monopoly 73
4.4 Oligopoly 80
4.4.1 Cournot (Cournot–Nash) Oligopoly 80
4.4.2 Bertrand Oligopoly 84
4.4.3 Stackelberg Oligopoly 86
4.5 Natural Monopoly 87
4.5.1 The Rationale for Natural Monopolies 87
4.5.2 Sustainability and Efficiency of the Natural Monopoly in 89
a Contestable Market
4.5.3 Sustainability and Efficiency of the Natural Monopoly in 90
a Market with Entry Barriers
4.6 Heterogeneous Oligopoly and Monopolistic Competition 91
4.6.1 Sticky Prices in Oligopoly Markets 92
4.6.2 Heterogenization and Monopolistic Competition 93
4.7 Instability of Oligopolistic Competition: Possibilities for 95
Strategic Behavior of Firms
Contents ix
4.8 A Final Consideration on Firm Size, Strategic Cooperation, 96
Monopolistic Competition, and Real-World Markets
5. Ideal Neoclassical Market and General Equilibrium 98
5.1 Consumer Theory 99
5.1.1 Preferences 99
5.1.2 Utility, Maximization, and Demand 100
5.2 Production Theory 105
5.2.1 The Production Function 105
5.2.2 Cost Minimization and Cost Functions 108
5.2.3 Profit Maximization 110
5.3 Partial Equilibrium 112
5.4 General Equilibrium 114
5.4.1 Welfare Theorems and Walras’ Law 114
5.4.2 Existence, Uniqueness, and Stability, and the 118
Sonnenschein–Mantel–Debreu Conditions
5.5 Further Developments 120
5.5.1 The Ramsey Growth Model 120
5.5.2 New Classicals and New Keynesians 121
5.6 Critical Evaluation 123
6. Critique of the Neoclassical ‘Perfect Market’ Economy and 125
Alternative Price Theories
6.1 Introduction 125
6.2 The Mirowski Critique 125
6.2.1 Classical Mechanics 126
6.2.2 From Substance to Field 127
6.2.3 The Fall of Classical Physics 129
6.2.4 The Mistaken Energy-Value Analogy 129
6.2.5 The Epistemic Break between Classical and Neoclassical 130
Economics
6.3 Internal Inconsistencies and a more Realistic Market 132
Outcome
6.3.1 Atomistic Markets and the Impossibility of a Horizontal 132
Demand Curve
6.3.2 Market Outcomes in a more Realistic Simulation 133
6.4 The Classical Theory of Prices and the Sraffian Critique of 135
the Neoclassical Theory of Value
6.4.1 Foundations of the Classical Theory of Prices 135
6.4.2 Sraffian Critique of Neoclassical Theory of Value 136
6.4.3 A Classical One-Commodity Model after Sraffa 137
6.4.4 A Classical N-Commodity Model after Sraffa 138
