Complexity Leads to Benefits: Pareto-Improving Chaos in a Heterogeneous Duopoly Market

Yasuo Nonaka ()
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Yasuo Nonaka: Chuo University

A chapter in Nonlinear Dynamics and Heterogeneous Interacting Agents, 2005, pp 103-119 from Springer

Abstract: Summary This paper investigates the long-run properties of chaotic dynamics in a Cournot duopoly market. To this end, it constructs a nonlinear, discrete-time Cournot model in which duopoly firms are heterogeneous and have nonlinear reaction functions with different microeconomic foundations. Due to the nonlinearity, the output adjustment process of the firms generates chaotic fluctuations. This paper demonstrates that for both firms, the long-run average profit along a chaotic trajectory can be higher than the profit at all possible equilibria when external effects on production are asymmetric. Further, it is proved that consumer surplus is also higher along the trajectory. The result thus indicates a possibility that from a long-run viewpoint, chaotic fluctuations can be Pareto-improving.

Keywords: Chaotic Dynamic; Consumer Surplus; Reaction Function; Reaction Curve; Average Profit (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-540-27296-0_8

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DOI: 10.1007/3-540-27296-8_8

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