Bounded Rationality in a Cournot Duopoly Game

Mariano Runco

Abstract


This paper analyzes choices and welfare in a Cournot duopoly setting with linear demand using four models of bounded rationality. The models studied in this paper are Level-k, Cognitive Hierarchy, Asymmetric Quantal Response and Noisy Introspection. It is found that in the Level-k model choices, profits and welfare alternate around the Nash Equilibrium levels depending on whether the level is odd or even. In the Cognitive Hierarchy model the choices of the first two types (L-0 and L-1) coincide with the choices in the Level-k model, a L-2 produces a smaller quantity while the quantity of a L-3 is higher or lower depending on the value of a particular parameter in the model. Both in the Asymmetric Quantal Response and Noisy Introspection models, we find that choices are spread around the Nash Equilibrium level for all parameter values and thus welfare is below the Nash Equilibrium benchmark. We also use parameter estimates from other well-known experiments to obtain an approximation to empirically plausible welfare levels.


Keywords


Cournot Game; Bounded Rationality; Level-k Model; Asymmetric Quantal Response Equilibrium; Noisy Introspection; Cognitive Hierarchy

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References


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    Ensayos Revista de Economía, Vol. 36, No. 1, Mayo 2017, es una publicación semestral editada por la Universidad Autónoma de Nuevo León, a través de la Facultad de Economía con la colaboración del Centro de Investigaciones Económicas, Av. Lázaro Cárdenas 4600 Ote., Fracc. Residencial Las Torres, Monterrey, N.L. C.P. 64930. Tel. +52 (81) 8329 4150 Ext. 2463 Fax. +52 (81) 8342 2897. Editor Responsable: Daniel Flores Curiel, Reserva de Derechos al Uso Exclusivo No. 04-2015-091013542400-203, ISSN 2448-8402, ambos otorgados por el Instituto Nacional del Derecho de Autor. Responsable de la última actualización de este Número, Facultad de Economía UANL, M.C. Hans Y. Martinez Torres, Av. Lázaro Cárdenas 4600 Ote., Fracc. Residencial Las Torres, Monterrey, N.L. C.P. 64930. Tel. +52 (81) 8329 4150. Fecha última de actualización 9 de Mayo de 2017.

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