Competition à la Cournot with bounded rationality

Sandiumenge Boy, Màxim

Competition à la Cournot with bounded rationality

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Citation

Sandiumenge Boy, M. Competition à la Cournot with bounded rationality. 2019. handle: http://hdl.handle.net/10230/41924

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Abstract

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.