The Formation of Production Networks: How Supply Chains Arise from Simple Learning with Minimal Information

• URL: http://arxiv.org/abs/2504.16010v1
• Date: Tue, 22 Apr 2025 16:18:19 GMT
• Title: The Formation of Production Networks: How Supply Chains Arise from Simple Learning with Minimal Information
• Abstract summary: We develop a model where firms determine the price at which they sell their differentiable goods, the volume that they produce, and the inputs (types and amounts) that they purchase from other firms.<n>A steady-state production network emerges endogenously without resorting to assumptions such as equilibrium or perfect knowledge about production technologies.
• Score: 0.0
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: We develop a model where firms determine the price at which they sell their differentiable goods, the volume that they produce, and the inputs (types and amounts) that they purchase from other firms. A steady-state production network emerges endogenously without resorting to assumptions such as equilibrium or perfect knowledge about production technologies. Through a simple version of reinforcement learning, firms with heterogeneous technologies cope with uncertainty and maximize profits. Due to this learning process, firms can adapt to shocks such as demand shifts, suppliers/clients closure, productivity changes, and production technology modifications; effectively reshaping the production network. To demonstrate the potential of this model, we analyze the upstream and downstream impact of demand and productivity shocks.

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