Discrete Dynamics in Nature and Society

Discrete Dynamics in Nature and Society / 2006 / Article

Open Access

Volume 2006 |Article ID 032103 | https://doi.org/10.1155/DDNS/2006/32103

Tönu Puu, "Rational expectations and the Cournot-Theocharis problem", Discrete Dynamics in Nature and Society, vol. 2006, Article ID 032103, 11 pages, 2006. https://doi.org/10.1155/DDNS/2006/32103

Rational expectations and the Cournot-Theocharis problem

Received18 Apr 2006
Accepted01 May 2006
Published31 Aug 2006

Abstract

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.

References

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Copyright © 2006 Tönu Puu. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


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