Abstract
The cobweb model of price stability with lagged price elasticities is extended to include nonlinear terms. The result falls within nonlinear mapping models such as the logistics map. Nonlinearities prevent the unbounded oscillation predicted from the unstable linear cobweb, but the price time series may exhibit chaotic (unpredictable) endogenous fluctuations. The theory is applied to the U.S. crude oil market. Regressing consumption against price gives lagged elasticities greater than current elasticities, indicating linear instability. This instability is seen in a mapping model of the price time series. Predictions of the model are given both with and without nonlinear terms, indicating large continuing endogenous price fluctuations.
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