Evolutionary Competition Between Adjustment Processes in Cournot Oligopoly: Instability and Complex Dynamics

Abstract

We consider a model of evolutionary competition between adjustment processes in the Cournot oligopoly model and investigate the effect of increasing the number of firms. Our focus is on Nash play versus a general short-memory adaptive adjustment process. We find that, although Nash play has a stabilizing influence, a sufficient increase in the number of firms in the market tends to make the Cournot-Nash equilibrium unstable. This shows that the famous result by Theocharis (Rev Econ Stud 1960), that Cournot oligopoly markets are unstable for more than three firms, is robust, although the instability threshold increases in the presence of Nash firms. We establish that both the existence and the level of this threshold depend on the information costs associated with Nash play. Moreover, the interaction between adjustment processes naturally leads to the emergence of complicated endogenous fluctuations as the number of firms increases, even when demand and costs are linear.