Adjustment to Equilibrium after a Demand Shock: A Strategic Interaction View
Quaderni - Working Paper DSE No. 952
29 Pages Posted: 1 Jul 2014
Date Written: June 27, 2014
Abstract
In this paper we verify the functioning of the standard neoclassical adjustment to equilibrium after a demand shock in a non-cooperative simultaneous Cournot duopoly with complete, symmetric and imperfect information. Our results show that in such a framework the adjustment to the long-run level of output by the entire industry or part of it is no longer guaranteed. We show that the size of the demand shock determines the nature and number of equilibria generated by strategic interaction, whereas the post-adjustment real wage level determines which equilibrium is actually obtained.
Keywords: Cournot duopoly, wage adjustment, demand shock
JEL Classification: D43, E30
Suggested Citation: Suggested Citation
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