- Learning Cycles in Bertrand Competition with Differentiated Commodities and Competing Learning Rules
- Journal of Economic Dynamics & Control
- Volume | Issue number
- 37 | 12
- Pages (from-to)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper stresses the importance of heterogeneity in learning. We consider a Bertrand oligopoly with firms using either least squares learning or gradient learning for determining the price. We demonstrate that convergence properties of the rules are strongly affected by heterogeneity. In particular, gradient learning may become unstable as the number of gradient learners increases. Endogenous choice between the learning rules may induce cyclical switching. Stable gradient learning gives higher average profit than least squares learning, making firms switch to gradient learning. This can destabilize gradient learning which, because of decreasing profits, makes firms switch back to least squares learning.
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