Theories of Expectations for N Competing Firms
The theory of oligopoly discussed so far ignores the consequences of the fact that information is a costly good. It is time to start remedying this neglect. If information is costly, then some ignorance is optimal. The behavior of the market’s participants, who lack omniscience, depends on how they learn, what they know, and how they use their knowledge. Neglect of these considerations in many theories of oligopoly is more a testimony to the difficulty of analyzing these aspects of reality than to widespread agreement among scholars that these are unimportant problems. It is prudent, therefore, to proceed from the simpler to the more complicated cases. In particular some simplifying assumptions about demand are necessary. Let both the price and aggregate quantity be continuous variables and let the demand condition be represented by a continuously differentiable function relating price and aggregate quantity such that these two variables vary inversely. Assume that the firm offers the same product to all customers at a uniform price per unit thereby ruling out price discrimination among the customers of a given firm. However, even these assumptions do not imply a uniform price in the market if information is a costly good. This important point deserves some explanation.
KeywordsDemand Function Spectral Radius Policy Variable Demand Condition Uniform Price
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