Equilibrium selection of a homogenous duopoly with extrapolative foresight

Abstract

This paper conducts a further analysis concerning equilibrium selection in a widely-studied nonlinear Cournot duopoly game, where each firm is capable to forecast its rival's output in the near future through a straightforward extrapolative foresight technology. Compared with the prior related work in which just one firm can implement such technology, this newly developed adjustment mechanism is endowed with more rationality in the sense that there appear more intelligent firms. It turns out this more rational adjustment mechanism does lead to more convergence to asymmetric equilibrium behavior for a weak foresight ability. Our finding shows that some undesirable complex behavior such as fluctuations and divergent trajectories can be inhibited by increasing the number of such rational firms.