DYNAMIC BEHAVIOUR IN A BERTRAND MODEL WITH BOUNDED RATIONAL PLAYERS

Abstract

Imperfect competition represents a main topic of modern economic analysis. It can be easily noticed in the actual economic climate, manifesting in relation with product quantity (Cournot model), price (Bertrand model) or quality. Whether we are talking about the output or price competition scenario, a common denominator would be the fact that in the oligopoly theory’s first period, the researchers were focused on the static approach of the models. Subsequently, an increasing interest in a dynamic approach was observed, a more detailed analyses being considered to better align with the economic reality. In the current paper we intents to analyze a Bertrand dynamic duopoly, with players competing in terms of price, while making use of a bounded rationality mechanism in order to establish charging levels. Based on a nonlinear equational system, the mathematic modelling of such a game is focused on the investigation of the equilibrium state. This way, the current analysis leads to the conclusion that the adjustment speed of bounded rational player, as well as the differentiation degree, strongly impact the Nash equilibrium stability. This dynamic approach and also the conclusions of this paper are intented to generate reader’s interest from both economic and mathematical point of view.

Keywords

• bertrand model
• oligopoly
• stability
• product differentiation