Bayesian learning in mis-specified models

Maarten-Pieter Schinkel, Jan Tuinstra and Dries Vermeulen

No 1134-8984, BILTOKI from Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística)

Abstract: A central unanswered question in economic theory is that of price formation in disequilibrium. This paper lays down the methodological groundwork for a model that has been suggested as an answer to this question (Arrow, 1959; Fisher, 1983; Hahn, 1989). We consider sellers that monopolistically compete in prices but have incomplete information about the structure of the market they face. They each entertain a simple demand conjecture in which sales are perceived to depend on the own price only, and set prices to maximize expected profits. Prior beliefs on the parameters of conjectured demand are updated into posterior beliefs upon each observation of sales at proposed prices, using Bayes' rule. The rational learning process thus constructed drives the price dynamics of the model. Its properties are analysed. Moreover, a sufficient condition is provided, relating objectively possible events and subjective beliefs, under which the price process is globally stable on a conjectural equilibrium for almost all objectively possible developments of history.

Keywords: oligopolistic price setting; bayesian learning; conjectural equilibrium; global stability (search for similar items in EconPapers)
Date: 2000-02
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Persistent link: https://EconPapers.repec.org/RePEc:ehu:biltok:5824

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Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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