A Cobweb Model with Alternating Demand and Supply Functions

Abstract

In this work I present a cobweb model for markets characterized by two couples of demand and supply functions which cyclically alternate with period two, in a succession of peak and off-peak market phases. Starting from classical adaptive expectations, a new expectation formation mechanism is presented, to take into account such markets’ peculiarity. In particular, to adapt the previous in-phase expected price, agents use both in-phase and out-of-phase expectation errors, suitably weighted through a phase weight. It is shown that the resulting model is described by a non-autonomous difference equation. The local asymptotic stability of the steady state equilibrium is studied, showing that it depends on the expectation weight, the phase weight and on both the relative slopes, at the equilibrium, of the supply functions with respect to the demand functions. Several crucial differences with respect to the classical cobweb model are highlighted, showing the potentially ambiguous role of expectation weight and of relative slopes. It is shown that destabilization can occur both through a flip and a Neimark-Sacker bifurcation, which can occur for the same market conditions and different expectation weights.