Stability of the Cournot-Nash Equilibrium in Standard Oligopoly

Abstract

The 19c. physics is a cognitive archetype of contemporary economics, where static, linear, closed systems that head for thermodynamic equilibrium were of great importance. In this standard of scientific knowledge were included selfish aspirations of agents, which served to prove stability of market equilibrium. The strive of entrepreneurs after profit maximization brings economic systems to a stable Cournot–Nash state of equilibrium, which is determined by the point of crossing of reaction curves. This type of reasoning still sets standards for education of microeconomics. Meanwhile, numerical explorations of simple, standard, nonlinear models of oligopoly prove that Cournot–Nash points are stable only over shortest periods. These are periods in which variables are changing (production values), and parameters (marginal costs) remain constant. According to a convention adopted in economics, in short periods various kinds of costs can change, including marginal costs. The only unchanging category in these periods are fixed costs. The postulate of profit maximization induces entrepreneurs to lower marginal costs. It provokes drifting of markets along short-term equilibrium states towards states of higher complexity. States far from equilibrium are natural market states. It contradicts the basics of traditional microeconomics. Selfish aspirations of agents do not guarantee stability of market equilibrium.