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Imitators and Optimizers in a Changing Environment

We analyze the dynamic interaction between imitation and myopic optimization in an environment of changing marginal payoffs. Focusing on finite irreducible environments, we unfold a trade-off between the degree of interaction and the size of environmental shocks. The optimizer outperforms the imitator if interaction is weak or if shocks are large. We use the example of Cournot duopoly to give economic meaning to this condition. To establish our main result, we rely on continuous state space Markov theory. In particular, it turns out that introducing a stochastic environment with finitely many states suffices to make an otherwise deterministic process ergodic.

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Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 03/03.

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Length: 31 pages
Date of creation: 21 Jun 2003
Date of revision:
Handle: RePEc:hhs:bergec:2003_003
Contact details of provider: Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Phone: (+47)55589200
Fax: (+47)55589210
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  1. Douglas Gale & Robert W. Rosenthal, 1996. "Experimentation, Imitation, and Stochastic Stability," Papers 0065, Boston University - Industry Studies Programme.
  2. 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.
  3. Fernando Vega-Redondo, 1997. "The Evolution of Walrasian Behavior," Econometrica, Econometric Society, vol. 65(2), pages 375-384, March.
  4. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
  5. Rhode, Paul & Stegeman, Mark, 2001. "Non-Nash equilibria of Darwinian dynamics with applications to duopoly," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 415-453, March.
  6. Gale, Douglas & Rosenthal, Robert W., 2001. "Experimentation, Imitation, and Stochastic Stability: Addendum," Journal of Economic Theory, Elsevier, vol. 97(1), pages 164-174, March.
  7. Conlisk, John, 1980. "Costly optimizers versus cheap imitators," Journal of Economic Behavior & Organization, Elsevier, vol. 1(3), pages 275-293, September.
  8. Schenk-Hoppe, Klaus Reiner, 2000. "The evolution of Walrasian behavior in oligopolies," Journal of Mathematical Economics, Elsevier, vol. 33(1), pages 35-55, February.
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