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The long-run benefits of chaos to oligopolistic firms

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Listed author(s):
  • Huang, Weihong

Abstract

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
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Maskin, Eric & Tirole, Jean, 1987. "A theory of dynamic oligopoly, III : Cournot competition," European Economic Review, Elsevier, vol. 31(4), pages 947-968, June.
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  6. Huang, Weihong, 1995. "Caution implies profit," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 257-277, July.
  7. Huang, Weihong, 2005. "On the statistical dynamics of economics," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 543-565, April.
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  9. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
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Cited by:

  1. HUANG Weihong, 2009. "Relative Profitability of Dynamic Walrasian Strategies," Economic Growth Centre Working Paper Series 0903, Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre.
  2. Huang, Weihong, 2011. "Price-taking behavior versus continuous dynamic optimizing," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1-2), pages 37-50, April.
  3. HUANG Weihong, 2009. "Price-taking Strategy Versus Dynamic Programming in Oligopoly," Economic Growth Centre Working Paper Series 0904, Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre.
  4. Yu, Weisheng & Yu, Yu, 2014. "The complexion of dynamic duopoly game with horizontal differentiated products," Economic Modelling, Elsevier, vol. 41(C), pages 289-297.
  5. Fanti, Luciano & Gori, Luca, 2012. "The dynamics of a differentiated duopoly with quantity competition," Economic Modelling, Elsevier, vol. 29(2), pages 421-427.
  6. Tuinstra, Jan & Wegener, Michael & Westerhoff, Frank, 2014. "Positive welfare effects of trade barriers in a dynamic partial equilibrium model," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 246-264.
  7. Huang, Weihong, 2010. "On the complexity of strategy-switching dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 445-460, September.
  8. Angelini, Natascia & Dieci, Roberto & Nardini, Franco, 2009. "Bifurcation analysis of a dynamic duopoly model with heterogeneous costs and behavioural rules," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(10), pages 3179-3196.

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