A cobweb model with elements from prospect theory

Ahmad Naimzada, Nicolò Pecora () and Fabio Tramontana
Additional contact information
Nicolò Pecora: Catholic University

Journal of Evolutionary Economics, 2019, vol. 29, issue 2, No 10, 763-778

Abstract: Abstract We present a cobweb model to explain price adjustment in a competitive market with homogeneous firms based on assumptions from Prospect Theory. Price changes are evaluated with respect to a psychological reference price which enters directly into the demand function. Accordingly, firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Differently from the traditional cobweb model, the economy is described by a discontinuous map. Without assuming specific non-linearities and keeping the essential underlying mechanics of the model intact, we find that the implementation of several features from Prospect Theory into our simple cobweb model may significantly influence the market dynamics. Behavioral parameters play an important role for the market stability by reducing fluctuations and by directly affecting consumers’ demand as well as production decisions.

Keywords: Cobweb model; Reference price; Transaction utility; Behavioral economics; Discontinuous maps; Complex dynamics (search for similar items in EconPapers)
JEL-codes: D03 E32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s00191-018-0595-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joevec:v:29:y:2019:i:2:d:10.1007_s00191-018-0595-z

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/191/PS2

DOI: 10.1007/s00191-018-0595-z

Access Statistics for this article

Journal of Evolutionary Economics is currently edited by Uwe Cantner, Elias Dinopoulos, Horst Hanusch and Luigi Orsenigo

More articles in Journal of Evolutionary Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().