In this paper we study oligopolies of generic size consisting of heterogeneous firms, which adopt best response adjustment mechanisms with either perfect foresight (rational firms) or static expectations (naive firms). Assuming an isoelastic demand function and possibly different marginal costs for the two groups of firms, we focus on the local stability of the Nash equilibrium. We show that, with respect to the oligopoly composition, described in terms of the fraction of rational firms, different scenarios are possible. We find that a high rationality degree may not always guarantee stability, in particular when rational firms have sufficiently larger marginal costs. In fact, in this situation, increasing the fraction of rational firms can even introduce instability. Besides the usual scenarios in which replacing some naive firms with rational ones leads to a stabilization of (or at least keeps unchanged) the dynamics, we provide a family of situations, characterized by costs ratio favorable to naive firms, in which equilibrium loses its stability when naive firms are replaced by rational ones. The results we present are both analytical and simulative.

Cavalli, F., Naimzada, A., Pireddu, M. (2015). Heterogeneity and the (de)stabilizing role of rationality. CHAOS, SOLITONS AND FRACTALS, 79, 226-244 [10.1016/j.chaos.2015.05.017].

Heterogeneity and the (de)stabilizing role of rationality

Cavalli, F;Naimzada, A;Pireddu, M
2015

Abstract

In this paper we study oligopolies of generic size consisting of heterogeneous firms, which adopt best response adjustment mechanisms with either perfect foresight (rational firms) or static expectations (naive firms). Assuming an isoelastic demand function and possibly different marginal costs for the two groups of firms, we focus on the local stability of the Nash equilibrium. We show that, with respect to the oligopoly composition, described in terms of the fraction of rational firms, different scenarios are possible. We find that a high rationality degree may not always guarantee stability, in particular when rational firms have sufficiently larger marginal costs. In fact, in this situation, increasing the fraction of rational firms can even introduce instability. Besides the usual scenarios in which replacing some naive firms with rational ones leads to a stabilization of (or at least keeps unchanged) the dynamics, we provide a family of situations, characterized by costs ratio favorable to naive firms, in which equilibrium loses its stability when naive firms are replaced by rational ones. The results we present are both analytical and simulative.
Articolo in rivista - Articolo scientifico
Heterogeneous oligopoly, rationality, local stability, bifurcation
English
2015
79
226
244
partially_open
Cavalli, F., Naimzada, A., Pireddu, M. (2015). Heterogeneity and the (de)stabilizing role of rationality. CHAOS, SOLITONS AND FRACTALS, 79, 226-244 [10.1016/j.chaos.2015.05.017].
File in questo prodotto:
File Dimensione Formato  
CHAOS_7677.pdf

accesso aperto

Descrizione: Articolo
Tipologia di allegato: Author’s Accepted Manuscript, AAM (Post-print)
Dimensione 3.65 MB
Formato Adobe PDF
3.65 MB Adobe PDF Visualizza/Apri
CSF15b.pdf

Solo gestori archivio

Tipologia di allegato: Publisher’s Version (Version of Record, VoR)
Dimensione 3.61 MB
Formato Adobe PDF
3.61 MB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/89322
Citazioni
  • Scopus 8
  • ???jsp.display-item.citation.isi??? 9
Social impact