Spatial competition and bounded rationality: Retailing at the edge of chaos

Abstract

The spatial dimension of competition among retail outlets is well researched and typically captured with spatial interaction models. A stream of theoretical research has studied the consequences of incorporating various types of dynamics into these models. We build on this research by incorporating a behavioral decision process based on bounded rationality, and by allowing for unexpected adversity in the environment in the form of exogenous shocks. Given these characteristics - spatial competition, boundedly rational decision making, and environmental adversity - we study the long-run dynamics of a model retail industry. The model reaches a stochastic steady state which is "poised," in the sense that a shock may - or may not - trigger a wave of innovation which sweeps the entire system. Detailed investigation of this steady state shows that it has the characteristics of a general type of organization, known as self-organized criticality, that has been described in both theoretical biology and statistical physics.