Evolutionary Cournot competition with endogenous technology choice: (in)stability and optimal policy

F. Lamantia (), A. Negriu () and Jan Tuinstra
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F. Lamantia: University of Amsterdam
A. Negriu: University of Amsterdam

No 16-08, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We study a dynamic oligopoly market model where quantity setting firms can choose one of two production technologies. We find that boundedly rationality in production (best-reply dynamics) and technology choice (evolutionary selection of better performing technologies) as sources of market dynamics, can generate endogenous instability and complicated dynamics, including chaotic fluctuations and co-existing attractors with fractal basins of attraction. By studying successively more complex versions of our model we analyze these two different sources of instability separately and also investigate their interaction. We find that boundedly rational production decisions amplify technological instability whereas boundedly rational technology decisions do not contribute to the production-driven destabilization of the Nash equilibrium. In any case, whenever the two types of decisions interfere in an endogenously unstable market, fluctuations follow a visibly different pattern compared to the fluctuations of a market with only one source of instability. Finally, we show that an innovation policy that aims to alter the market equilibrium without taking into account off-equilibrium dynamics may, in an intrinsically dynamic world, generate welfare losses by destabilizing a stable equilibrium and/or by raising the amplitude of market fluctuations.

Date: 2016
New Economics Papers: this item is included in nep-com, nep-cse, nep-evo, nep-ind and nep-ino
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