Learning the demand function in a repeated Cournot oligopoly game

In dynamic models in economics, often “rational expectations” are assumed. These are meant to show that the agents can correctly foresee the result of their own and the other agents' actions. In this paper, it is shown that this cannot happen in a simple oligopoly model with a linear demand function and constant marginal costs. “Naive expectations,” that is, where each agent assumes the other agents to retain their previous period action, are shown to result in a 2-period cycle. However, adapting to the observed periodicity always doubles the actual resulting periodicity. In general, it is impossible for the agents to learn any periodicity except the trivial case of a fixed point. This makes the whole idea of “rational expectations” untenable in Cournot oligopoly models.

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Nonlinear Cournot oligopoly games with isoelastic demand function: The effects of different behavior rules

Communications in Nonlinear Science and Numerical Simulation ◽

10.1016/j.cnsns.2012.04.023 ◽

2012 ◽

Vol 17 (12) ◽

pp. 5249-5255 ◽

Cited By ~ 7

Author(s):

Xing Gao ◽

Weijun Zhong ◽

Shue Mei

Keyword(s):

Demand Function ◽

Cournot Oligopoly ◽

Isoelastic Demand Function

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Local Stability of Cournot Equilibrium as the Number of Firms Increases

Iraqi Journal of Science ◽

10.24996/ijs.2021.62.3.27 ◽

2021 ◽

pp. 972-980

Author(s):

Adyda Ibrahim ◽

Nerda Zura Zaibidi ◽

Azizan Saaban

Keyword(s):

Local Stability ◽

Marginal Cost ◽

Demand Function ◽

Cournot Oligopoly ◽

Cournot Equilibrium ◽

Adaptive Expectations ◽

The Third ◽

Decision Mechanisms ◽

Isoelastic Demand Function ◽

Number Of Firms

In this paper, a Cournot oligopoly with isoelastic demand function and constant marginal cost is considered. The local stability conditions of the Cournot equilibrium are determined for four models with different decision mechanisms. In the first model, firms adjust their outputs using the best reply response with naive expectations. The second model is a generalization of the first one, where firms have adaptive expectations. Meanwhile, the third and fourth models adopt the bounded rationality and local monopolistic approximation, respectively. The results show that, in the case of identical firms, the Cournot equilibrium is always stable when the firms adopt the local monopolistic approximation mechanism.

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