Behavioral Heterogeneity and Cournot Oligopoly Equilibrium
It is not infrequent to see studies of imperfect competition or of industrial organization rest upon questionable foundations such as the hypothesis that inverse market demand is, whenever it is positive, concave or even linear. Assumptions of this sort are not robust (i.e. "additive") in the sense that they are not usually preserved through aggregation of different sectors that would satisfy them individually. The present paper investigates an alternative specification that is based upon the plausible existence of significant heterogeneities among demanders. It is demonstrated that specific forms of demand heterogeneity tend to stabilize market expenditures. In a partial equilibrium context, sufficient demand heterogeneity is shown to imply existence and unicity of a Cournot oligopoly equilibrium.
Brown, Donald J., DeMarzo, Peter M., and Eaves, B. Curtis
Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which an available asset suddenly becomes redundant. We show that this discontinuity disappears if we allow an agent in the economy to introduce a new asset when such redundancies occur. This enables us to prove existence in the GEI model using a standard path-following argument. In contrast with the previous literature, our approach does not require the introduction of abstract manifolds such as the Grassmannian. Hence, available algorithms for path-following in RK can be applied to compute equilibria in the GEI case.