Unknown Demand Function and Stability

Abstract

Except for Subsection 5.2.4 our analyses of oligopoly models have been based on an assumption that each firm in an oligopolistic industry has complete information of market demand function for its product as well as for the market price and rivals’ outputs in the past. In this chapter we drop this assumption of complete in formation. Thus although each firm does not in general have exact knowledge of the true market demand function, it is assumed to have its own estimate of (or subjective) market demand function which coupled with complete information of the past market price enables it to estimate the rest of industry output in the past. In section 8.2 this information pattern is introduced into the Cournot model involving no product differentiation. The Cournot model with this information structure was first taken up by Y.Hosomatsu (1969). Negishi and Okuguchi(1972) (see also Subsection 5.2.4) then introduced the same information pattern into a Stackelberg-type leader-leader model of duopoly. Hosomatsu, however, simplified his analysis by using linear demand functions and quadratic cost functions. Our analysis will be exempt from such restrictive specifications regarding demand and cost functions. In Section 8.3 the Cournot assumption will be replaced by adaptive expectations.KeywordsDemand FunctionReaction FunctionCharacteristic RootInformation PatternQuadratic Cost FunctionThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.