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