IDEAS home Printed from https://ideas.repec.org/a/ere/journl/vxxxivy2015i2p79-94.html
   My bibliography  Save this article

Bounded Rationality in a Cournot Duopoly Game

Author

Listed:
  • Mariano Runco

    () (Department of Economics, College of Public Policy and Justice, Auburn University at Montgomery. USA.)

Abstract

This paper analyzes choices and welfare in a Cournot duopoly setting with linear demand using four models of bounded rationality. The models studied in this paper are Level-k, Cognitive Hierarchy, Asymmetric Quantal Response and Noisy Introspection. It is found that in the Level-k model choices, profits and welfare alternate around the Nash Equilibrium levels depending on whether the level is odd or even. In the Cognitive Hierarchy model the choices of the first two types (L-0 and L-1) coincide with the choices in the Level-k model, a L-2 produces a smaller quantity while the quantity of a L-3 is higher or lower depending on the value of a particular parameter in the model. Both in the Asymmetric Quantal Response and Noisy Introspection models we find that choices are spread around the Nash Equilibrium level for all parameter values and thus welfare is below the Nash Equilibrium benchmark. We also use parameter estimates from other well-known experiments to obtain an approximation to empirically plausible welfare levels.

Suggested Citation

  • Mariano Runco, 2015. "Bounded Rationality in a Cournot Duopoly Game," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 79-94, November.
  • Handle: RePEc:ere:journl:v:xxxiv:y:2015:i:2:p:79-94
    as

    Download full text from publisher

    File URL: http://www.economia.uanl.mx/revistaensayos/xxxiv/2/4_Bounded_rationality_in_a_Cournot_duopoly_game.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stahl Dale O. & Wilson Paul W., 1995. "On Players' Models of Other Players: Theory and Experimental Evidence," Games and Economic Behavior, Elsevier, vol. 10(1), pages 218-254, July.
    2. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    3. Antoni Bosch-Domènech & José Garcia Montalvo & Rosemarie Nagel & Albert Satorra, 2004. "Finite mixture analysis of beauty-contest data using generalised beta distributions," Economics Working Papers 737, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2010.
    4. Weizsacker, Georg, 2003. "Ignoring the rationality of others: evidence from experimental normal-form games," Games and Economic Behavior, Elsevier, vol. 44(1), pages 145-171, July.
    5. Uri Gneezy, 2005. "Step-Level Reasoning and Bidding in Auctions," Management Science, INFORMS, vol. 51(11), pages 1633-1642, November.
    6. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
    7. Antoni Bosch-Domènech & José Montalvo & Rosemarie Nagel & Albert Satorra, 2010. "A finite mixture analysis of beauty-contest data using generalized beta distributions," Experimental Economics, Springer;Economic Science Association, vol. 13(4), pages 461-475, December.
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cournot Game; Bounded Rationality; Level-k Model; Asymmetric Quantal Response Equilibrium; Noisy Introspection; Cognitive Hierarchy;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ere:journl:v:xxxiv:y:2015:i:2:p:79-94. 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: (Dora María Vega Facio). General contact details of provider: http://edirc.repec.org/data/feualmx.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.