Rules of thumb, deviations from the standard objective functions, or explicit cognitive
bounds have been introduced in Industrial Organization to tackle irrationality. At the
same time, a considerable literature has been extending level-k since Nagel (1995), but
little has been done on its application outside experimental settings. To address this we
define a model of boundedly rationality and we apply it to a Cournot competition game,
finding that the accuracy of anticipation and the distribution ...
Rules of thumb, deviations from the standard objective functions, or explicit cognitive
bounds have been introduced in Industrial Organization to tackle irrationality. At the
same time, a considerable literature has been extending level-k since Nagel (1995), but
little has been done on its application outside experimental settings. To address this we
define a model of boundedly rationality and we apply it to a Cournot competition game,
finding that the accuracy of anticipation and the distribution of level 0 players’ action
play a critical role in explaining which firms become larger in dynamic settings.
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