Evolution of Conjectures in Cournot Oligopoly

Abstract

This paper considers a dynamic market where a fixed number of firms engages in Cournot oligopoly. Firms choose the output level based on their assessment of the competitors' reaction to their output choice. This is parameterized using an approach reminiscent of conjectural variations. On a second level firms adapt their conjectural variation by imitating the most successful firm. Simulations suggest that in the long-run the Walrasian, Cournot-Nash and cartel equilibria survive. The theory of nearly-complete decomposability is used to show that the Walrasian equilibrium is approximately the only stochastically stable state.