INDUSTRIAL FERFORMANCE AND A MARKET STRUCTURE
(A REVIEW OF A GAMING EXPERIMENT)
Alexander Vs Ryzhenkov
Novosibirsk State University
2 Pirogov Street
Novosibirsk 630090 USSR
ABSTRACT
This paper demonstrates patterns of industrial
performance and factors of competitiveness in a representative
gaming experiment carried out with ai help of a simulation.
model of universal commodity production at Novosibirsk
University. The paper inquires about disequilibrium dynamics of
the modeling economy. and concentrates on repeated decisions
of players emphasizing the role of experience § and learning
in their behaviour. It analyses the intra- and inter-
sectoral competition and path-dependent structures of produc-
tion. The interpretation of experimental results is evoked by
Marxian economic theory. The study shows that “the applied
theoretical framework can lead to Propositions deduced or
derived empirically in industrial economics.
INTRODUCTION
The model developed by K.K. Valtukh in collaboration with
F.E. Pusep (BambTyx and Ilycenm 1988) basing on the formalised
exposition of Marx’s theory of commodity and surplus value
(WValtukh 1987) reflects interconnections between technological
and socio-economic sides of capitalist reproduction. This model
was used as a teaching tool and as.an instrument of investiga~
tion in the classroom (Ryzhenkov 1990, Ryzhenkov 1991). The
present paper reports some new findings skipping ai few details
of the experiment .
I recall that there are three sectors specializing in
manufacturing only one kind of commodity on strictly monopro-
duct firms. Each kind of commodity can be produced by three or
less technological modes. Every elementary technique can belong
to different capitalists, but initially there are nine capi-
talists possessing nine firms with respective elementary tech-
niques. Technological modes diffuse here endogenously mainly
through imitations by new entrants. Inventions and innovations
occurred in the past not considered explicitly. ;
A capitalist is allowed to construct a "new" firm with any
given technique. There is no problem forvhim if he has only one
“old" firm. But if the capitalist has two “old” firms, a. cre-
ation of a "new" firm requires to give up at least one
“old"firm. Stocks of raw materials from closed firms may be
Page 766
System Dynamics '91 Page 767
productively consumed , yet their fixed assets are lost. These
conditions imply the “administrative” market-entry and market-
exit restrictions.
The structure of output in the basal year was such that
commodities were sold at prices of production providing equal
(positive) profit rares in all (three) sectors, the reprodu~
cible resources were fully utilized, workers bought necessary
consumer goods to satisfy their normal needs.
At the same time in that idealized situation there were
disequilibrium elements too: it is, perhaps, sufficient to
mention here different magnitudes and composition of individual
advanced capital, unequal profitability of firms and of tech-
niques. Due to these (and to some other) elements the economy
develops giving rise to new combinations of opposite tenden-
cies.
Possible paths of evolution are not absolutely predeter-
mined by the initial conditions and by the rules of the game in
spite of purely deterministic form of all equations of the
model. The point is that personal selective decision-making
introduces stochastic elements in reproduction. of» capital. A
bifurcation can occur at each situation depending on concrete
decisions of the economic agents.
THE NON-LINEAR DISEQUILIBRIUM DYNAMICS
The dynamics of the main structural parameters, such as
output, production capacity, prices, individual and social
labour values (approximated by corresponding total labour input
coefficients), profitability and others are displayed in Fi-
gures 1-20. The descrete points are connected by linear pi-
eces for greater visuality.
The deep source of non-linearity is the endogenous techno-
logical progress. Although all tecnniques are characterised by
fixed input coefficients and constant returns to scale at opti-
mal combinations of inputs, a production possibility set is not
a cone since the constraint of labour supply excludes a limit-
less expansion of existing plants (cf. Banbryx 1974). The divi-
sion of investment ‘into intensive and extensive, opening and
closing of firms, disproportions of reproduction are immediate
factors of non-linearity.
Disequilibrium lato sensu which was present already at the
initial situation reproduces itself. Let us look at Figures 2,
10. At the very beginning of the game players having. been = en-
dewed with money capital awaiting its application. Demand for
elements of fixed assets for investing in the existing and in
new firms rocketed. Still, the productive capacities of the
second sector producing elements of fixed assets and stocks of
the respective goods were too limited to match the increased
demand. This disparity motivated the expansion of this sector
amplified by the self-ordering. The production capacity tended
to expand until output catched up to. demand (cf. Sterman 1985,
18-21). i
In each succeeding time interval the capacity (the "hun-
Page 768 System Dynamics '91
1000.00 3
800.00 4
600.00
boaaee Vf 400.00
\
\ re
¥
100.00 4 toto 4
REO ROO 600 eee 70.00 0.00,
t. capocity
ra. of the thet Sector tin prysical terms) Fig.
Note. Output tren
Production capacity
/ . The ratio
350.00 3 100.00 5
300.00 4
80.00 4
250.00 4
200.00 4 60.00 4
150.00 4 pes 00's
x a \
100.00 4 Spel g! ‘ -
. at eed ;~ The rate
7 20.00 4 ra
50.00 7 oe a
Sey \
~ N
0.00 0.00 7
0.00 2604.00 6.00 8.00 10.00 9.66 2.00. 4.00 6.08 8.00 10.00
Fig. direct labour
3. years |, Ratio of input
a a a Sova er
System Dynamics ‘91
Page 769
2.20 i ¢ 1.00 3
2.00 4 ae
ae 1.60 —~ 6
180 ae ¢ 1.80 4
aad 1.403
ot 3 136 SS. 4
1.00 4 ae 3
TET Ee ERD DO Tbo 1-10 Je aaa Py ay ry "Tho
FOS. dest slows Gott: yeura/Sonk wat)
3.00
2.80 4
2.60
2.40 4
2.20
2.00
1.80 3
1.60 4
1.40,
oO.
60 "2604.00" 8.00 B00
7, Individual vol of the third
7 tt tea seas”
years /cost
Fia-6. Incividual vanes of the sycond cpawnodty by
2.404
2.00 4
E]
1.60 4
2
1.20 3 I
0.80 4
0.40 ;
0.00 200 4.00. 600. 8.00 10.00
Fis, Total fobour input. o
actor (manyeore/eost units)
pes
atl
Page 770
System Dynamics ‘91
2.00 5
Note.
00 "8
ve
Demand-supply ratio
10.00
Price (wage rate)
1.60 2.00 3
1.40
1.50 J
1.20
1.00
1.00 4
0.80
oso 0.50 4 z
a
0.40 mae e ele wt
ar) a) ae roses - 8.00 10.00 ay) 20" i 4.60 age 710.00
i (monetary uni va Wage monetary, unite/ va
lteter” Suerte) Gimensionteees “™? * a
System Dynamics '91 Page 771
0.30 3 4.00 3
0.20 4
°
3
n w
Fo Nv
8 8
BS
0.00 4
0.00 4
I
~O10.4 1.004
0.20 Frere 7 a 2.00 4
CRAY ARMM RRR RY ARR
Fig.12Profitoblity of the, technological modes in the first "19-l4,Profitability of the technological modes in the second sector
sector (dimensionless) (dimensionless)
0.30 3.00 5 : , :
0.20
0.10 200 4
8
0.00 9 :
1.00 4 2
0.10 1
Tr
-0.20 0.00 3 = 3
0.30
1.00 4
-0.40
EO BO BOO BOO TOD 200, ’ :
oJ 2 A eo Ss 10) 0.00 200. 4006.00. B00 10.00
Fig..F, Profitablity of the technological modes in the third FigJé Rates of profit in the sectors of the economy
water (dimensionless) (dimensionless)
Page 772 System Dynamics '91
er") overshoots the previous demand (the “running wild boar")
then falls below in the next year in trying to correct the
earlier overshoot. The demand, in its turn, is affected by
these changes of capacities (our “wild boar" reacts against the
“dangerous hunter"). The amplitude of recurrent fluctuations of
capacity is greater than that of demand. Time delay in the
feedback loops as well as the abrupt attempts to correct the
discrepancies shape such behaviour (cf. Forrester 1976, 2-2).
The observed overexpansion of the capacities would be probably
even greater if the lifetime of the productive assets was long-
er than one year fixed in this sector.
The’ general economic decline in the middle of the game
forced players to develop the centralized crisis management. In
particular, they agreed to stimulate final demand hiring exses-
sive labour power (see Figures 4, 12). This strategy of "“bene~
volent" commodity producers proved to be successful, although
it went beyond capitalist social relations in their pure form.
(Returning to the risky metaphor, I could imagine that the
“hunter" almost tamed the "wild boar".)
VALUES AND PRICES UNDER OLIGOPOLY
In each sector there is a dominant technique which is the
most profitable. Dominated methods were either eliminated or
suppressed while dominant ones diffused within the established
sectors through new capital investments. Such choice of tech-
nique brings about some inefficiency from the social point of
view since the most profitable methods are not necessarily the
most labour-saving (cf. Figures 5-7, 13-15). A ranking of tech-
niques according to profitability diverges from their ranking
according to individual values. Due to disregarding innovations
a tendency towards a technological uniformity and hence to
erading differences between firms* productivity levels was
exaggerated,
In agreement with the classical theory of commodity and
surplus value relative prices finally dropped for commodities
of sectors with relatively high growth of labour productivity,
the value added produced in the declining (third) sector was
redistributed by competitive pricing in favour of the growing
(first and second) ones. In spite of the bounded rationality of
the economic agents technical change is to be defined socially
progressive overall because magnitudes of social value tended
to decrease (see Figures 5-8).
Figures 17-19 represent oligopolistic structures of produ-
ction and of the markets. It is interesting that despite conti-
nuous modified reproduction of these structures prices tended
to move in the long run in accordance with labour values.
CONCENTRATION OF CAPITAL AND FIRM TURNOVER
The aim of capitalist mode of production is to promote
self-expansion of capital, but methods by which it accomplishes
‘this imply depreciation of existing capital, stoppages and
System Dynamics '91 Page 773
0.60 3 0.80 5
0.50 4
040 9
0M F
0.20 3
0.10 | . oe.
aetna e!
bead. AA SR TERT EE Toko OB ET NR BaD BBE Tako
17. Hertindan indexes 7 Sper ; yeors
re Nor the first sector Fe NEN he|socond’ sector
Note. Producers' concentration
Sellers’ concentration ---------
Buyers' concentration ‘rrr
0.70 3 1.40 3
cat
000 J 1263 pret My
a
0.50 4 1009 ew
0.40 4 0.00 3
0.30 4 0.60 4
0.20 4 0.40 4 Ky
ee eee H
0.10 3 020 4 he Joke t
ge a a Be ag I eae ae
|
0.00
0.60 2.604.606.0080 10.00 Odd DOO nO BOO. 7000
Fig.19, Horfindohil indexea for he conc’ coplial Ky
the third sector and rele ot Lerplos Serer tengo)
Page 774 System Dynamics ‘91
crises in-the reproduction. This contradictory development was
pronounced in our experiment too.
The processes of accumulation and of concentration of
capital were rather monotonous judging by its total labour
value and by Herfindahl index, the sum of all capitalists* squa-
red capital shares, respectively. The rate of surplus value
tended to rise because of the growth of social labour producti-
vity -while norms of workers® consumption were held» constant
(see Figs 20).
Herfindahl indices were also calculated similarly for
estimating concentration of production, of supply and of demand
(see Fig. 17-19). With their help we come to the following very
tentative observations in cross-section consistent with the
hypotheses often advanced in industrial economics :
~ the greater the relative overall rate of growth of output,
the more is the number of imitators and the higher the average
operating rate in this sector;
- the less the number of firms inside a sector, the higher
the concentration of production;
—the higher profit rate in a sector, the greater ai number of
the firm openings, on the onevhand, and of the firm closings,
on the other hand, and the higher the concentration of supply;
—~the lower the profitability of a sector, the more intensive
the propensity to restrict production and supply of commodites
among capitalists;
-the longer the lifetime of fixed assets in..a particular
sector, the higher the barrier to exit.
Our data do not warrant the hyposesis that the rate of
imitation is higher in more. competetive industries (cf. Mansfi-
eld 1961, 753). There was some apparent tendency for this rate
to be lower in sectors with the longer lifetime of fixed as-
sets, but it was difficult to isolate the influence of this
factor from the influence of others.
In the experiment, ceteris paribus, the monopolistic tend-
ency was brought about by competitive advantages of firms with
the most effective technological modes, which got extra-
profits. The opposite tendency had at least two origins:the
ease of imitation (extra-profits are eroded away by imitators)
and the recognition of the fact by extant firms with large
market shares that a further expansion could spoil their own
markets (cf. Nelson and Winter 1982, 280-295).
CONCLUSION
The teaching experiment considered above supports the
idea that learning is a more basic concept than a rational
behaviour. Dynamic evolution of the modeling economy depends on
how fast students learn in the classroom. They not only
reveal information embodied in the initial conditions and rules
(like in the: well-known game "Life") but create a new informa-
tion as well via decision-making. The gaming exper iment
System Dynamics '91 Page 775
helped to shed light on the controversal issues of eco~
nomic theory thus stimulating the interest in learning and
exploration.
REFERENCES
Forrester, J. W. 1976. Principles of Systems. Cambridge
(Mass.): Wright-Allen Press
Mansfield, E. 1961. Technical Change and the Rate of ~Imi=
tation. Econometrica 29(4): 741-766
Nelson, R. and S. G. Winter. 1982. An Evolutionary. Theory
of Economic Change. Cambridge (Mass.) a.o.: The Belknap’ Press
of Harvard University Press : “
Ryzhenkov, A. V..1990.. Teaching Experiments with a Simula-
tion Model of Universal Commodity Production. In Froceedings of
the 1990 International System Dynamics Conference, Chestnut
Hill, Massachusetts, 948-962
Ryzhenkov, A. V. 1991. Computer-Based Case Studies of
Capital Accumulation and Technical Change. The Italian Review
of System Dynamics (forthcoming) 3
Sterman, J. D. 1985. A Behavioral Model of the Economic
Long Wave. Journal of Economic Behavior and Organization. 6:17-
53
Valtukh, K. K. 1987. Marx’s Theory of Commodity and Sur-
plus Value. A Formalised Exposition. Moscow: Frogress Publi-
shers
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TRBCHHHe MONeJM. TenyeHimm pasparua ekoHOMmaKM CCCP, Ton pen.
K. K. Baspryxa. Hospocudupcx: Hayxa ,
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