Nonlinear dynamics in a heterogeneous duopoly game with adjusting players and diseconomies of scale

A repeated, discrete time, heterogeneous Cournot duopoly game with bounded rational and adaptive players adjusting the quantities of production is subject of investigation. Linear inverse demand function and quadratic cost functions reflecting decreasing returns to scale are assumed. The game is modeled with a system of two difference equations. Evolution of outputs over time is obtained by iteration of a two dimensional nonlinear map. Existing equilibria and their stability are analyzed. In face of diseconomies of scale, bounded rational and adaptive duopolists are shown to experience a decrease in the latitude of their output adjustment decisions with respect to the market stability compared to constant returns to scale and ceteris paribus. Chaotic dynamics is confirmed to depend mainly on the adjustment behavior of the bounded rational player, who if overshoots leaves the adaptive player with limited opportunities to stabilize the market again, hence industries facing diseconomies of scale are found to be less stable than those with constant marginal costs. Complexity of the dynamical system is examined by means of numerical simulations, where the paper extends the results of other authors who considered analogous games assuming linear cost functions. Intermittent transition to chaos and attractor merging crisis are shown among others.