This paper presents an evolutionary model of Bertrand competition in a mark
et for a homogeneous good, where identical firms face a technology with dec
reasing returns to scale. Only quoted prices and realized profits are obser
ved. The behavior of firms is based on imitation of success and experimenta
tion, and is formally modeled through behavioral principles. We find that,
even under simple behavior, the dynamic process selects a strict subset of
the Nash equilibria of the underlying game. In the long run all firms make
positive profits. Adding more sophistication, we obtain a finer prediction,
named "central prices." This prediction essentially coincides with the Wal
rasian equilibrium, if costs are quadratic. Classification Numbers: C72, L1
3. (C) 2000 Academic Press.