Aspiration-Based Learning in a Cournot Duopoly Model

Abstract

This paper explores the implication of aspiration-based learning in a simple Cournot duopoly model. When the firms know the average industry-wide profit and perceive it as aspiration level, then the market leads to collusive outcome or collusive equilibrium. In this sense, all firms have the same reference point, i.e., the average industry-wide profit as their aspiration level. However, the firms may have their own aspiration level (e.g., a goal of profit) and will choose their strategy accordingly. Therefore, the firms will try to reach their own aspiration level. This aspiration level is not static and the firms will adjust their aspiration level. In this research we consider a market that consists of several firms with their own aspiration level. We propose an aspiration-based learning shaped by an information searching mechanism to examine the behavior of the firms in the market. A firm updates its aspiration level by searching the information of the other firms’ aspiration level and then compares this information with its current aspiration level. Based on its aspiration level, the firm will choose the best strategy through learning. Simulation results show that the learning model and the information searching mechanism lead the market to competitive outcome, i.e., Nash equilibrium, if the firms have many strategies even if their initial aspiration level is low. However, if the firms have fewer strategies and start with high initial aspiration level, then collusive behavior will occur.