The impact of market preferences on the evolution of market price and product quality

A significant challenge for firms in an open-competition marketplace is to balance the conflicting attributes of price and quality. Higher quality levels tend to lead to increased product costs, which, depending on market preferences, can trigger an increase in consumer demand. This paper presents a multi-agent model that allows for an exploration of how price and quality evolve as a result of direct market competition between firms. A new competition model, based on price and quality, is defined. Agents compete by determining their price and quality levels with a view to maximizing their profit. Our goal is to examine a range of market configurations and study how agent strategies evolve over time. We focus on those factors which contribute to each agent's survival in this evolutionary setting. We use game theoretic simulation as a basis to examine various agent strategies. A genetic algorithm is used to characterize a changing environment which evolves over time to reflect the emergence of fitter strategy attributes. Individuals can evolve their own market preferences over subsequent generations and adapt to their preferred market strategy. Agent strategies evolve rapidly to reflect the bias of their individual market. The price and quality relationship of a given market is a primary driver of the evolution of agent strategies in that market. Significantly, our results show the emergence of strategies that prefer low price and high quality sensitive markets. This is despite the penalties which are incurred by the higher costs of increased quality. These results have potentially interesting applications to real-world market dynamics, particularly as companies strive to position their products optimally on different markets.