Imitation Dynamics in Oligopoly Games with Heterogeneous Players

Abstract

We investigate the role and performance of imitative behavior in a class of quantity-setting, Cournot games. Within a framework of evolutionary competition between rational, myopic best-response and imitation heuristics with differential heuristics’ costs, we found that the equilibrium stability depends on the sign of the cost differential between the unstable heuristic (Cournot best-response) and the stable one (imitation) and on the intensity of the evolutionary pressure. When this cost differential is positive (i.e., imitation is relatively cheaper vis a vis Cournot), most firms use this heuristic and the Cournot equilibrium is stabilized for market sizes for which it was unstable under Cournot homogeneous learning. However, as the number of firms increases (n=7), instability eventually sets in. When the cost differential is negative (imitation is more expensive than Cournot), complicated quantity fluctuations, along with the co-existence of heuristics, arise already for the triopoly game.