Effects of Size, Composition, and Evolutionary Pressure in Heterogeneous Cournot Oligopolies with Best Response Decisional Mechanisms

Abstract

We study heterogeneous Cournot oligopolies of variable sizes and compositions, in which the firms have different degrees of rationality, being either rational firms with perfect foresight or naive best response firms with static expectations. Each oligopoly can be described using its size and composition, that is, the fraction of firms that are rational. We take into account two frameworks, one in which the decisional rules are exogenously assigned and the other in which the firms may change their heuristics. We consider a switching mechanism based on a logit rule, where the switching propensity is regulated by a parameter which represents the evolutionary pressure. In the fixed fractions setting, we prove that, in general, the composition has a stabilizing effect, while increasing the oligopoly size leads to instability. However, we show that, for particular parameters settings, stability is not affected by the composition or the firms number. Similarly, in the evolutionary fractions setting, we analytically prove that when marginal costs are identical, increasing the evolutionary pressure has a destabilizing effect. Nevertheless, focusing on particular examples with different marginal costs we are able to show that evolutionary pressure may also have a stabilizing or a neutral role.