The Evolution of Freely Competitive Markets

This chapter, which is mainly based on Forrest et al. (Pennsyl Econ Rev 29(1):92–115, 2022), provides a simplified approach to the study of evolutions of an economic market from the angles of profits and market competition. It first looks at the profit landscape of the primitive firms that serve sporadically existent demands in an emerging market, followed by that of the incumbent firms of a maturing market. By doing so, this chapter is able to establish the conclusion that the forever evolving preferences of consumers help make market competition relentlessly intensify, while more firms are encouraged to enter the established oligopoly market. Before we see how such a simplified approach will play an important role in the development of natural endowments for business firms, the appendix of this chapter shows how conclusions on the evolution of economic markets can be beautifully employed to further the understanding of the Gabaix’s (Econometrica 79:733–772, 2011) granular hypothesis. Specifically, among other results, the appendix develops precise conditions for the phenomenon of Gabaix’s granular hypothesis either to appear or not to appear. As a confirmation of these theoretically important conclusions, empirical case analyses are given, while several important unanswered questions are posted for future research.