Winner-take-all or long tail? A behavioral model of markets with increasing returns

This paper develops a model of consumer choice that demonstrates why some markets with increasing returns converge to a winner-take-all outcome while many others have a power law market share distribution with a “long tail” of small-share products. The model takes the standard winner-take-all model of increasing returns and adds a simple behavioral assumption: when faced with complex choices, decision makers first quickly eliminate many of the available options using a simple heuristic before selecting from the remaining feasible set. We examine the market-level consequences of this model using an agent-based simulation. Under a wide range of parameters the model produces a power law share distribution. But when consumers have very large feasible sets the market converges to a winner-take-all outcome, and when consumers have very small feasible sets the model produces an evenly split market. Copyright © 2017 System Dynamics Society

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