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An evolutionary Cournot model with limited market knowledge

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  • Bischi, Gian Italo
  • Lamantia, Fabio
  • Radi, Davide

Abstract

In this paper we analyze a dynamic game of Cournot competition with heterogeneous firms choosing between two different adaptive behavioral rules in deciding output strategies. The underlying oligopoly structure is standard: using a constant return to scale technology, N firms produce homogeneous goods, which are sold in a market characterized by constant price elasticity. In this setup, we assume that a fraction of firms employs a quite rough rule of thumb, the so-called Local Monopolistic Approximation (LMA), whereas the complementary fraction plays Best Reply (BR), a more demanding strategy in terms of information and computation requirements. The model is first considered with exogenously fixed fractions of firms in the two complementary groups. Then it is generalized by considering an endogenous evolutionary switching process between the two behavioral strategies based on profit-driven replicator dynamics. The role of the number of firms, information costs and inertia (or anchoring attitude) in production decisions is analyzed, as well as the influence in the evolutionary process of random noise in the demand function and memory of past profits. Global properties of the oligopoly with evolutionary pressure between behavioral rules are discussed, with particular regard to cases in which the Nash equilibrium is unstable.

Suggested Citation

  • Bischi, Gian Italo & Lamantia, Fabio & Radi, Davide, 2015. "An evolutionary Cournot model with limited market knowledge," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 219-238.
  • Handle: RePEc:eee:jeborg:v:116:y:2015:i:c:p:219-238
    DOI: 10.1016/j.jebo.2015.04.024
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    References listed on IDEAS

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    Cited by:

    1. Lamantia, Fabio & Pezzino, Mario, 2016. "Evolutionary efficacy of a Pay for Performance scheme with motivated agents," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 107-119.
    2. Kopányi, Dávid, 2017. "The coexistence of stable equilibria under least squares learning," Journal of Economic Behavior & Organization, Elsevier, vol. 141(C), pages 277-300.
    3. repec:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0501-0 is not listed on IDEAS
    4. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 15-38.
    5. Dieci, Roberto & Schmitt, Noemi & Westerhoff, Frank H., 2018. "Interactions between stock, bond and housing markets," BERG Working Paper Series 133, Bamberg University, Bamberg Economic Research Group.
    6. repec:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0536-2 is not listed on IDEAS
    7. repec:exl:25engi:v:27:y:2016:i:1:p:32-38 is not listed on IDEAS
    8. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Stability and welfare effects of profit taxes within an evolutionary market interaction model," BERG Working Paper Series 122, Bamberg University, Bamberg Economic Research Group.
    9. Fabio Lamantia & Mario Pezzino & Fabio Tramontana, 2017. "Tax evasion, intrinsic motivation, and the evolutionary effects of tax reforms," The School of Economics Discussion Paper Series 1707, Economics, The University of Manchester.
    10. Blaurock, Ivonne & Schmitt, Noemi & Westerhoff, Frank, 2017. "Market entry waves and volatility outbursts in stock markets," BERG Working Paper Series 128, Bamberg University, Bamberg Economic Research Group.
    11. Domenico De Giovanni & Fabio Lamantia, 2016. "Control delegation, information and beliefs in evolutionary oligopolies," Journal of Evolutionary Economics, Springer, vol. 26(5), pages 1089-1116, December.

    More about this item

    Keywords

    Oligopolies; Local Monopolistic Approximation; Evolutionary dynamics; Heterogeneous firms; Nonlinear phenomena;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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