Price adjustment in a model of monopolistic competition

Jan Tuinstra

No 00-13, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We consider a price adjustment process in a model of monopolistic competition. Firms have incomplete information about the demand structure. When they set a price they observe the amount they can sell at that price and they observe the slope of the true demand curve at that price. With this information they estimate a linear demand curve. Given this estimate of the demand curve they set a new optimal price. We investigate the dynamical properties of this learning process. We Þnd that, if the cross-price effects and the curvature of the demand curve are small, prices converge to the Bertrand-Nash equilibrium. The global dynamics of this adjustment process are analyzed by numerical simulations. By means of computational techniques and by applying results from homoclinic bifurcation theory we provide evidence for the existence of strange attractors.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:00-13

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