Discrete Dynamics in Nature and Society
Volume 2006 (2006), Article ID 32103, 11 pages
Rational expectations and the Cournot-Theocharis problem
The Center for Regional Science (CERUM), Umeå University, Umeå 90187, Sweden
Received 18 April 2006; Accepted 1 May 2006
Copyright © 2006 Tönu Puu. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
In dynamic models in economics, often “rational expectations” are
assumed. These are meant to show that the agents can correctly foresee the result of their own and the other agents' actions. In this paper, it is shown that this cannot happen in a simple oligopoly model with a linear demand function and constant marginal costs. “Naive expectations,” that is, where each agent assumes the other agents to retain their previous period action, are shown to result in a 2-period cycle. However, adapting to the observed periodicity always doubles the actual resulting periodicity. In general, it is impossible for the agents to learn any periodicity except
the trivial case of a fixed point. This makes the whole idea of “rational expectations” untenable in Cournot oligopoly models.