Monopolistic Competition and Bounded Rationality

This paper shows how a marker reaches a unique steady state in monopolistic competition. Without knowing anything about strategic interdependence and only perceiving a linear demand for its own product, every firm follows a simple price strategy to maximize its current profit in each period, The strategy is based on a firm's own cost function, slope estimate, and its sales and price in the previous period, We show that a market with asymmetric and non-linear demand converges to a unique steady state under rather general conditions. (C) 2001 Elsevier Science B.V. All rights reserved.