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 criti‐cality, that has been described in both theoretical biology and statistical physics.