Understanding the nature of predatory pricing in the large-scale market economy with genetic algorithms

This paper applies co-evolutionary genetic algorithms to an economic modelling problem. The chain-store game is a game-theoretic model for predatory pricing (price wars); the modelling goal is to study when predatory pricing can arise. It is found that, even under the same payoff structure, the results of the co-evolution of weak monopolists and entrants are sensitive to the representation of the decision-making process. Two representations are studied: 1) the action-based representation, and 2) the strategy-based representation. The former is to represent a naive mind and the latter is to capture a sophisticated mind. For the action-based representation, the convergence results are easily obtained and predatory pricing is only temporary in all simulations. However, for the strategy-based representation, predatory pricing is not a rare phenomenon and its appearance is cyclical but not regular.