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Dynamic Behavior of Imperfectly Competitive Economies with Multiple Equilibria

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  • Russell Cooper

Abstract

This paper investigates the dynamic behavior of an economy with multiple Nash equilibria. The first part of the paper analyzes an abstract game exhibiting multiple equilibria. A history dependent selection criterion is proposed which induces correlated behavior in equilibrium even though agents are playing one-shot games and disturbances are not correlated over time. The second part of the paper investigates a specific model of multiple equilibria. Here the multiplicity is induced by the presence of a discrete decision on the part of firms regarding their choice of technique. The implications of the selection criterion introduced in the first part of the paper are illustrated through this example. Again correlated behavior emerges in a sequence of independent one-shot games. The model economy may also experience prolonged periods in which a low productivity technology is in use and then, as a consequence of a large real disturbance, may switch to an alternative equilibrium in which a high productivity technology is utilized. The paper also discusses the Pareto ordering of these equilibria.

Suggested Citation

  • Russell Cooper, 1987. "Dynamic Behavior of Imperfectly Competitive Economies with Multiple Equilibria," NBER Working Papers 2388, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2388
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    1. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-340, June.
    2. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-392, May.
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    4. Oliver Hart, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 109-138.
    5. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    6. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    7. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-1190, December.
    8. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    9. Furth, Dave, 1986. "Stability and instability in oligopoly," Journal of Economic Theory, Elsevier, vol. 40(2), pages 197-228, December.
    10. Friedman, James W., 1985. "Cooperative equilibria in finite horizon noncooperative supergames," Journal of Economic Theory, Elsevier, vol. 35(2), pages 390-398, August.
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    Cited by:

    1. Sommarat Chantarat & Christopher Barrett, 2012. "Social network capital, economic mobility and poverty traps," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(3), pages 299-342, September.
    2. Cooper, Russell & Haltiwanger, John, 1990. "Inventories and the Propagation of Sectoral Shocks," American Economic Review, American Economic Association, vol. 80(1), pages 170-190, March.
    3. Randal J. Verbrugge, 1998. "Local Complementarities and Aggregate Fluctuations," Macroeconomics 9809016, EconWPA, revised 30 Sep 1998.
    4. Hans van Ees & Harry Garretsen, 1992. "On the Contribution of New Keynesian Economics," Eastern Economic Journal, Eastern Economic Association, vol. 18(4), pages 465-477, Fall.
    5. Durlauf, Steven N, 1991. "Multiple Equilibria and Persistence in Aggregate Fluctuations," American Economic Review, American Economic Association, vol. 81(2), pages 70-74, May.
    6. Patrick Artus, 1993. "Défauts de coordination des activités. Principes et exemples," Revue Économique, Programme National Persée, vol. 44(3), pages 551-568.
    7. Steven N. Durlauf, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 349-366.
    8. Steven N. Durlauf, 1991. "Path dependence in aggregate output," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.

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