Ambiguity aversion as a route to randomness in a duopoly game

Davide Radi and Laura Gardini

Papers from arXiv.org

Abstract: The global dynamics is investigated for a duopoly game where the perfect foresight hypothesis is relaxed and firms are worst-case maximizers. Overlooking the degree of product substitutability as well as the sensitivity of price to quantity, the unique and globally stable Cournot-Nash equilibrium of the complete-information duopoly game, loses stability when firms are not aware if they are playing a duopoly game, as it is, or an oligopoly game with more than two competitors. This finding resembles Theocharis' condition for the stability of the Cournot-Nash equilibrium in oligopolies without uncertainty. As opposed to complete-information oligopoly games, coexisting attractors, disconnected basins of attractions and chaotic dynamics emerge when the Cournot-Nash equilibrium loses stability. This difference in the global dynamics is due to the nonlinearities introduced by the worst-case approach to uncertainty, which mirror in bimodal best-reply functions. Conducted with techniques that require a symmetric setting of the game, the investigation of the dynamics reveals that a chaotic regime prevents firms from being ambiguity averse, that is, firms are worst-case maximizers only in the quantity-expectation space. Therefore, chaotic dynamics are the result and at the same time the source of profit uncertainty.

Date: 2023-11
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind, nep-mic and nep-upt
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