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A Price Adjustment Process In A Model Of Monopolistic Competition

Author

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  • JAN TUINSTRA

    (Department of Quantitative Economics and CeNDEF, University of Amsterdam, The Netherlands)

Abstract

We consider a price adjustment process in a model of monopolistic competition. Firms have incomplete information about the demand structure. When they set a price they observe the amount they can sell at that price and they observe the slope of the true demand curve at that price. With this information they estimate a linear demand curve. Given this estimate of the demand curve they set a new optimal price. We investigate the dynamical properties of this learning process. We find that, if the cross-price effects and the curvature of the demand curve are small, prices converge to the Bertrand-Nash equilibrium. The global dynamics of this adjustment process are analyzed by numerical simulations. By means of computational techniques and by applying results from homoclinic bifurcation theory we provide evidence for the existence of strange attractors.

Suggested Citation

  • Jan Tuinstra, 2004. "A Price Adjustment Process In A Model Of Monopolistic Competition," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 417-442.
  • Handle: RePEc:wsi:igtrxx:v:06:y:2004:i:03:n:s0219198904000289
    DOI: 10.1142/S0219198904000289
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    References listed on IDEAS

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    More about this item

    Keywords

    Bertrand competition; price adjustment; nonlinear oligopoly dynamics; bifurcation theory; Subject Classification: C72; Subject Classification: D21; Subject Classification: D43; Subject Classification: E30;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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