Endogenous preferences in a dynamic Cournot duopoly

Abstract

This research combines two strands of economic literature in a dynamic setting: endogenous preferences (on the consumer side) and strategic competitive markets (on the production side). This is done by considering a model in which aggregate demand depends on past consumption (Benhabib and Day, 1981; Gaertner and Jungeilges, 1988), whereas firms naively react to the rival's past decisions in determining aggregate supply (Puu, 1991). The interaction between the two sides of the market generates nonlinear and chaotic dynamics that could not be observed by considering each side separately. From an analytical point of view, the article shows that the stationary-state equilibrium can be destabilised either by flip bifurcations or by Neimark-Sacker bifurcations. Interestingly, the destabilisation of the stationary-state equilibrium can also occur when firms are homogeneous.