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The long-run benefits of chaos to oligopolistic firms

  • Huang, Weihong

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.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 4 (April)
Pages: 1332-1355

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:4:p:1332-1355
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  1. 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.
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  8. Michael Kopel, 1997. "Improving the performance of an economic system: Controlling chaos," Journal of Evolutionary Economics, Springer, vol. 7(3), pages 269-289.
  9. Huang, Weihong, 1995. "Caution implies profit," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 257-277, July.
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