Markets in equilibrium with firms out of equilibrium: A simulation study

We explore the effect of the limited ability to process information on the convergence of firms toward equilibrium. In the context of a Cournot oligopoly with a unique and symmetric Nash equilibrium, firms are modeled as adaptive economic agents through a genetic algorithm. Computational experiments show that while market production is close to equilibrium, firm production is relatively far from the individual equilibrium level. This pattern of firm heterogeneity is not an artifact of random elements built into the decisional process. Instead, it comes from the market interaction of firms with cognitive limitations. (C) 2006 Elsevier B.V. All rights reserved.