Rational expectations and the Cournot-Theocharis problem
In dynamic models in economics, often “rational expectations” are assumed. These are meant to show that the agents can correctly foresee the result of their own and the other agents' actions. In this paper, it is shown that this cannot happen in a simple oligopoly model with a linear demand fun...
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| Format: | Article |
| Language: | English |
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Wiley
2006-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/DDNS/2006/32103 |
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| _version_ | 1850105057923563520 |
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| author | Tönu Puu |
| author_facet | Tönu Puu |
| author_sort | Tönu Puu |
| collection | DOAJ |
| description | In dynamic models in economics, often “rational expectations” are
assumed. These are meant to show that the agents can correctly foresee the result of their own and the other agents' actions. In this paper, it is shown that this cannot happen in a simple oligopoly model with a linear demand function and constant marginal costs. “Naive expectations,” that is, where each agent assumes the other agents to retain their previous period action, are shown to result in a 2-period cycle. However, adapting to the observed periodicity always doubles the actual resulting periodicity. In general, it is impossible for the agents to learn any periodicity except
the trivial case of a fixed point. This makes the whole idea of “rational expectations” untenable in Cournot oligopoly models. |
| format | Article |
| id | doaj-art-404595d147b442d3a90ffc28c8f0ef24 |
| institution | DOAJ |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2006-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-404595d147b442d3a90ffc28c8f0ef242025-08-20T02:39:12ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2006-01-01200610.1155/DDNS/2006/3210332103Rational expectations and the Cournot-Theocharis problemTönu Puu0The Center for Regional Science (CERUM), Umeå University, Umeå 90187, SwedenIn dynamic models in economics, often “rational expectations” are assumed. These are meant to show that the agents can correctly foresee the result of their own and the other agents' actions. In this paper, it is shown that this cannot happen in a simple oligopoly model with a linear demand function and constant marginal costs. “Naive expectations,” that is, where each agent assumes the other agents to retain their previous period action, are shown to result in a 2-period cycle. However, adapting to the observed periodicity always doubles the actual resulting periodicity. In general, it is impossible for the agents to learn any periodicity except the trivial case of a fixed point. This makes the whole idea of “rational expectations” untenable in Cournot oligopoly models.http://dx.doi.org/10.1155/DDNS/2006/32103 |
| spellingShingle | Tönu Puu Rational expectations and the Cournot-Theocharis problem Discrete Dynamics in Nature and Society |
| title | Rational expectations and the Cournot-Theocharis problem |
| title_full | Rational expectations and the Cournot-Theocharis problem |
| title_fullStr | Rational expectations and the Cournot-Theocharis problem |
| title_full_unstemmed | Rational expectations and the Cournot-Theocharis problem |
| title_short | Rational expectations and the Cournot-Theocharis problem |
| title_sort | rational expectations and the cournot theocharis problem |
| url | http://dx.doi.org/10.1155/DDNS/2006/32103 |
| work_keys_str_mv | AT tonupuu rationalexpectationsandthecournottheocharisproblem |