An Evolutionary Model of Bertrand Oligopoly

Carlos Alós-Ferrer, University of Konstanz
Ana B. Ania, University of Vienna
Klaus R. Schenk-Hoppé, Univeryity of Leeds

Abstract

This paper presents an evolutionary model of Bertrand competition in a market for a homogeneous good, where identical firms face a technology with decreasing returns to scale. Only quoted prices and realized profits are observed. The behavior of firms is based on imitation of success and experimentation, and is formally modeled through behavioral principles. We find that, even under simple behavior, the dynamic process selects a strict subset of the Nash equilibria of the underlying game. In the long run all firms make positive profits. Adding more sophistication, we obtain a finer prediction, named "central prices.'' This prediction essentially coincides with the Walrasian equilibrium, if costs are quadratic.