A cobweb model with alternating demand and supply functions

Fausto, Cavalli

No 325, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: In this work I present a cobweb model for markets characterized by two couples of demand and supply functions which cyclically alternate with period two, in a succession of peak and off-peak market phases. Starting from classical adaptive expectations, a new expectation formation mechanism is presented, to take into account such markets’ peculiarity. In particular, to adapt the previous in-phase expected price, agents use both in-phase and out-of-phase expectation errors, suitably weighted through a phase weight. It is shown that the resulting model is described by a non-autonomous difference equation. The local asymptotic stability of the steady state equilibrium is studied, showing that it depends on the expectation weight, the phase weight and on both the relative slopes, at the equilibrium, of the supply functions with respect to the demand functions. Several crucial differences with respect to the classical cobweb model are highlighted, showing the potentially ambiguous role of expectation weight and of relative slopes. It is shown that destabilization can occur both through a flip and a Neimark-Sacker bifurcation, which can occur for the same market conditions and different expectation weights.

Keywords: Cobweb model; cyclic demand and supply; non-autonomous equations; complex dynamics (search for similar items in EconPapers)
JEL-codes: C60 C62 D84 E32 (search for similar items in EconPapers)
Pages: 22
Date: 2016-02-07, Revised 2016-02-07
New Economics Papers: this item is included in nep-mac
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