Misspecified Demand and Oligopolistic Competition: An Evolutionary Analysis

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JEL classification

• Oligopoly and Other Imperfect Markets
• Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
• Search; Learning; Information and Knowledge; Communication; Belief

Keywords

Evolutionary dynamics, Misspecified demand, Oligopoly games

Abstract

This paper proposes a simple oligopoly model in which firms can use the real demand function or a misspecified version of it to maximize their profits. While in cases of demand underestimation it is always more convenient for the firms not to distort this estimate, in cases of demand overestimation the possible configurations of equilibria can include any type of outcome based on the level of distortion to the demand. This result is made more robust by considering an evolutionary version of the game, in which the previous static game is played over time by firms randomly drawn from a population of companies. The last part of the paper provides some important considerations in terms of welfare, which underline the effect of demand distortion from the consumers’ point of view.