On the stability of the Cournot equilibrium: An evolutionary approach

Cars Hommes, M. Ochea () and Jan Tuinstra
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M. Ochea: University of Amsterdam

No 11-10, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We construct an evolutionary version of Theocharis (1960)'s seminal work on the stability of equilibrium in multi-player quantity-setting oligopolies. Two sets of behavioral heuristics are investigated under fixed and endogenously evolving fractions: (myopic) Cournot firms vs. Nash firms and Cournot firms vs. rational firms. The analysis with evolutionary competition between these heuristics nests the famous Theocharis instability threshold, n=3, as a special case and shows that Theocharis' result is quite robust. For evolutionary competition between the Cournot and the rational heuristic, both the existence and the magnitude of this threshold depend on the information costs associated with the rational heuristic. When information costs are positive a bifurcation route to chaos occurs as the number of firms increases. The evolutionary model therefore exhibits perpetual but bounded fluctuations, a feature not present in Theocharis' original model.

Date: 2011
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Citations: View citations in EconPapers (11)

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