Endogenous local interaction and multi-product firms

Abstract. Multi-product firms are modelled as locally interacting entities that gather information on the profitability of product combinations in an environment defined in terms of their currently supplied markets. They learn from their own past play. Local information gathering may slow down convergence and may prohibit profit rates from becoming equal. Cycles show parts of the economy that are in rest, while others remain in a state of flux. The first two results stem from the endogeneity of the interaction structure, while the third follows from the interplay of learning and information gathering. This paper was written while I was a Ph.D student at the European University Institute, Florence. I would like to thank Andrzej Baniak, Etienne Billette de Villemeur, Aedin Doris, Giovanni Dosi, Iouri Kaniovski, Spyros Vassilakis, Bruno Versaevel and two anonymous referees of this journal for their comments on previous drafts of this paper. I have greatly benefitted from the pleasant working atmosphere at IIASA, Laxenburg, where I stayed during the YSSP96. Financial support from the Fundatie van de Vrijvrouwe van Renswoude te's-Gravenhage, the Stichting Dr Hendrik Muller's Vaderlandsch Fonds and the Stichting "Noorthey" is gratefully acknowledged.