In this paper we
develop a stochastic version of a dynamic Cournot model. The model is dynamic
because firms are slow to adjust output in response to changes in their
economic environment. The model is stochastic
because management may make errors in identifying the best course of action
in a dynamic setting. We capture these behavioral errors with Brownian motion.
The model demonstrates that the limiting output level of the game is a random
variable, rather than a constant that is found in the non-stochastic case. In
addition, the limiting variance in firm output is smaller with more firms.
Finally, the model predicts that firm failure is more likely in smaller markets
and for firms that are smaller and less efficient at managing errors.
Tremblay, V.J. and Tremblay, C.H. (2012) New Perspectives on Industrial Organization: With Contributions from Behavioral Economics and Game Theory. Springer, Berlin. http://dx.doi.org/10.1007/978-1-4614-3241-8
Fisher, F. (1961) The Stability of Cournot Oligopoly Solutions: The Effects of Speeds of Adjustment and Increasing Marginal Costs. Review of Economic Studies, 28, 125-135. http://dx.doi.org/10.2307/2295710