Approximate Stochastic Stability with an Application to the Survival of Walrasian Conjectures in Cournot Oligopoly
27 Pages Posted: 28 Jun 2009
Date Written: May 2009
This paper presents a general framework for analysing stochastic stability in models with evolution at two levels. Under certain conditions these two levels can be disentangled and studied separately. In such cases the limit distribution at one level can be used to approximate the limit distribution of the entire dynamics. A precise upper bound of this approximation is given. The states in the support of this approximation are the approximate stochastically stable states. The approach is applied to a model of conjectural variation and imitation in Cournot oligopoly. If behavioural change takes place infrequently, the Walrasian conjecture and quantity is the unique approximate stochastically stable state.
Keywords: stochastic stability, nearly-complete decomposability, oligopoly
JEL Classification: L13, C73
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