The long-run benefits of chaos to oligopolistic firms
Conventional economic beliefs that 'equilibrium' is better than 'disequilibrium' and 'stability' is better than 'fluctuation' are challenged with a heterogeneous oligopolistic model that consists of a naive firm and a group of sophisticated firms. The naive firm is assumed to adopt a simple Cobweb strategy while the sophisticate firms, who command all market information, form a collusion and best respond the naive firm's current action. When the market equilibrium is unstable, the naive firm is able to turn an explosively diverging market into a bounded but chaotic one by adopting simultaneously a cautious adjustment strategy (that is, limiting the growth rate of output). There exists an upper-bound such that as long as the growth rate does not exceed this bound, the average profits made by all oligopolistic firms are higher than their respective equilibrium profits. Moreover, the average economic surplus can also be higher than the equilibrium surplus. In this sense, chaos is beneficial not only to all oligopolistic firms but also to the economy as a whole.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Droste, Edward & Hommes, Cars & Tuinstra, Jan, 2002.
"Endogenous fluctuations under evolutionary pressure in Cournot competition,"
Games and Economic Behavior,
Elsevier, vol. 40(2), pages 232-269, August.
- Droste, E. & Hommes, C.H. & Tuinstra, J., 1999. "Endogenous Fluctuations under Evolutionary Pressure in Cournot Competition," CeNDEF Working Papers 99-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Michael Kopel, 1997. "Improving the performance of an economic system: Controlling chaos," Journal of Evolutionary Economics, Springer, vol. 7(3), pages 269-289.
- Brock, W.A. & Hommes, C.H., 1996.
"A Rational Route to Randomness,"
9530r, Wisconsin Madison - Social Systems.
- Cars Hommes & Helena Nusse, 1991. "“Period three to period two” bifurcation for piecewise linear models," Journal of Economics, Springer, vol. 54(2), pages 157-169, June.
- John Conlisk, 1983. "Competitive Approximation of a Cournot Market," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 597-607.
- Huang, Weihong, 2005. "On the statistical dynamics of economics," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 543-565, April.
- Schaffer, Mark E., 1989. "Are profit-maximisers the best survivors? : A Darwinian model of economic natural selection," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 29-45, August.
- R. J. Ruffin, 1971. "Cournot Oligopoly and Competitive Behaviour," Review of Economic Studies, Oxford University Press, vol. 38(4), pages 493-502.
- Richard H. Day, 1983. "The Emergence of Chaos from Classical Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 201-213.
- Huang, Weihong & Zhang, Yang, 2007. "Distributional dynamics of cautious economic adjustment processes," Journal of Economic Behavior & Organization, Elsevier, vol. 62(3), pages 389-407, March.
- Weddepohl, Claus, 1995. "A cautious price adjustment mechanism: Chaotic behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 293-300, July.
- Maskin, Eric & Tirole, Jean, 1987. "A theory of dynamic oligopoly, III : Cournot competition," European Economic Review, Elsevier, vol. 31(4), pages 947-968, June.
- Huang, Weihong, 1995. "Caution implies profit," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 257-277, July.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:32:y:2008:i:4:p:1332-1355. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.