Heterogeneity and the (de)stabilizing role of rationality

Fausto Cavalli, Ahmad Naimzada, Marina Pireddu

Risultato della ricerca: Contributo in rivistaArticolo in rivistapeer review

7 Citazioni (Scopus)


In this paper we study oligopolies of generic size consisting of heterogeneous firms, which adopt best response adjustment mechanisms with either perfect foresight (rational firms) or static expectations (naive firms). Assuming an isoelastic demand function and possibly different marginal costs for the two groups of firms, we focus on the local stability of the Nash equilibrium. We show that, with respect to the oligopoly composition, described in terms of the fraction of rational firms, different scenarios are possible. We find that a high rationality degree may not always guarantee stability, in particular when rational firms have sufficiently larger marginal costs. In fact, in this situation, increasing the fraction of rational firms can even introduce instability. Besides the usual scenarios in which replacing some naive firms with rational ones leads to a stabilization of (or at least keeps unchanged) the dynamics, we provide a family of situations, characterized by costs ratio favorable to naive firms, in which equilibrium loses its stability when naive firms are replaced by rational ones. The results we present are both analytical and simulative.
Lingua originaleEnglish
pagine (da-a)226-244
Numero di pagine19
RivistaChaos, Solitons and Fractals
Stato di pubblicazionePubblicato - 2015


  • Adjustment mechanisms
  • Best response
  • Heterogeneous firms
  • Isoelastic demand functions
  • Local stability
  • Marginal costs
  • Nash equilibria
  • Perfect foresights


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