This dissertation seeks to amend a shortfall in the existing evolutionary economics literature, by developing a dynamic model of industry that incorporates both informational interdependence and interaction between firms and consumers. The model utilises this approach to provide an explanation of the growth and decline of a Marshallian-style firm. In addition, the model examines whether a technological advantage is necessary for a new firm to be successful in an established industry, as is often assumed in the evolutionary economics literature.
Within the model, consumers of a particular class of good are unaware of the quality of the offerings of firms within the market for that good. This is complicated by the fact that each firm's quality is stochastic, with a distribution dependent upon the firm's demand to capacity ratio which is unknown to consumers. Likewise firms are unaware of consumers' beliefs about the quality of their products. Consumers pass information on their choices in each period to one another through a social network. By contrast, a firm is only aware of its demand in each period. Based on this information, the firm must strategically plan its future capacity investments. Firms aim to achieve the highest present value of profit, and also eradicate competitors by attracting all available demand.
A new firm may enter the industry after it has become established. This new firm may have a technological advantage over existing firms, a capacity cost advantage, a superior growth strategy, or no advantage. Once it has entered the industry, the goal for the new firm is at least to achieve the level of demand and profits experienced by other firms.
The simulation outcomes indicate that a low quality offering by a firm reduces its future demand and profits. Results also state that a new firm entering an established industry cannot make a positive profit unless its capacity costs are significantly lower than the remainder of the industry. However, demand for a new firm's products can be increased if the firm has access to better production technology, is able to expand at a smoother rate, or utilises a more aggressive growth strategy.