Oligopoly Games with Local Monopolistic Approximation
We propose a repeated oligopoly game where quantity setting firms have incomplete knowledge of the demand function of the market in which they operate. At each time step they solve a profit maximization problem by using a subjective approximation of the demand function based on a local estimate its partial derivative, computed at the current values of prices and outputs, obtained through market experiments. At each time step they extrapolate such local approximation by assuming a linear demand function and ignoring the effects of the competitors outputs. Despite a so rough approximation, that we call "Local Monopolistic Approximation" (LMA), the repeated game may converge to a Nash equilibrium of the true oligopoly game, i.e. the game played under the assumption of full information. An explicit form of the dynamical system that describes the time evolution of oligopoly games with LMA is given for arbitrary differentiable demand functions, provided that the cost functions are linear or quadratic. Sufficient conditions for the local stability of Nash Equilibria are given. In the particular case of an isoelastic demand function, we show that the repeatead game based on LMA always converges to a Nash equilibrium, both with linear and quadratic cost functions. This stability result is compared with "best reply" dynamics, obtained under the assumption of isoelastic demand (fully known by the players) and linear costs.
|Date of creation:||Nov 2004|
|Date of revision:||Nov 2004|
|Contact details of provider:|| Postal: |
Phone: +39 02 6448 3089
Fax: +39 02 6448 3085
Web page: http://dipeco.economia.unimib.itEmail:
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bischi, Gian Italo & Kopel, Michael, 2001. "Equilibrium selection in a nonlinear duopoly game with adaptive expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 73-100, September.
- William A. Brock & Cars H. Hommes, 1997.
"A Rational Route to Randomness,"
Econometric Society, vol. 65(5), pages 1059-1096, September.
- Puu, T., 1998. "The chaotic duopolists revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 385-394, January.
- Droste, E. & Hommes, C.H. & Tuinstra, J., 1999.
"Endogenous Fluctuations under Evolutionary Pressure in Cournot Competition,"
CeNDEF Working Papers
99-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- 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.
- Rand, David, 1978. "Exotic phenomena in games and duopoly models," Journal of Mathematical Economics, Elsevier, vol. 5(2), pages 173-184, September.
- repec:cup:cbooks:9780521551861 is not listed on IDEAS
- Bonanno, Giacomo & Christopher Zeeman, E., 1985. "Limited knowledge of demand and oligopoly equilibria," Journal of Economic Theory, Elsevier, vol. 35(2), pages 276-283, August.
- Silvestre, Joaquim, 1977. "A model of general equilibrium with monopolistic behavior," Journal of Economic Theory, Elsevier, vol. 16(2), pages 425-442, December.
- Huang, Weihong, 1995. "Caution implies profit," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 257-277, July.
- Dana, Rose-Anne & Montrucchio, Luigi, 1986. "Dynamic complexity in duopoly games," Journal of Economic Theory, Elsevier, vol. 40(1), pages 40-56, October.
When requesting a correction, please mention this item's handle: RePEc:mib:wpaper:81. 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: (Roberto Reale)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.