A Cobweb Model with Local Externalities

J. Michael Orszag

Archive Discussion Papers from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: This paper considers extension of the standard cobweb model in a market with local externalities. In contrast with the standard cobweb model, firms must forecast both prices and local quantities; Fourier analysis is shown to lead to new constructive stability and existence conditions for equilibria with positive outputs. We find evidence of clusters of firms whose output behavior is correlated as equilibrium is reached. We also show that an appropriately defined "representative agent model" with a global externality exhibits the same mean or second order properties of aggregate output as the more complex model with local externalities.

Date: 1996
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