When cobweb meets oligopoly

Abstract

Purpose

The purpose of this paper is to present an oligopolistic version of the cobweb model that departs from the strict assumptions of perfect competition in the traditional cobweb model.

Design/methodology/approach

Introducing a model where n identical producers engage in Cournot competition, with output decisions influencing market prices. The paper retains the original assumptions of naive expectations and a linear model where price expectations of Cournot competitors are made simultaneously with production decisions. The investigation focuses on the model's behavior as the number of producers decreases or industry concentration increases. The authors also show empirical evidence when drawing the data from the pig sector in China and the USA.

Findings

The findings indicate that the cobweb model undergoes a transition from divergent to continuous and even convergent as the number of producers decreases or industry concentration increases. The incorporation of costs related to entry and exit from the market contributes to achieving a more stable equilibrium state.

Originality/value

The cobweb model has been primarily studied in an idealized market structure of perfect competition, and the assumptions that they share are not obviously appropriate to many agriculture markets. This study presents an alternative version of the cobweb model in an oligopolistic market that relaxes the strict assumptions of perfect competition. The authors show the dynamics of reduced competitor numbers or increased industry concentration on the convergence of the cobweb model based on subtle variations in parameters.

Citation

Zhang, Q., Lin, F., Wang, X. and Xin, X. (2024), "When cobweb meets oligopoly", China Agricultural Economic Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CAER-01-2024-0005