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Rational expectations and monopolistic trades

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  • Patrick Leoni

Abstract

We argue that the use of rational expectations in monopolistic markets, as typically done, is overly restrictive because the rationale of this approach is not met in those markets. In a model that encompasses a general equilibrium framework, we consider a monopolist (a producer) with subjective beliefs that endogenously hedges against fluctuations in input prices in a complete market. We introduce a notion of entropy of beliefs, and we characterize long-run optimal rational investments with this entropy. For irrational beliefs, we show that long-run profits are a decreasing function of this entropy. However, long-run profits always remain positive as long as the entropy remains finite despite the Market Selection Hypothesis that would predict long-run 0-profit. Copyright Springer-Verlag 2012

Suggested Citation

  • Patrick Leoni, 2012. "Rational expectations and monopolistic trades," Journal of Economics, Springer, vol. 107(2), pages 129-140, October.
    • Handle: RePEc:kap:jeczfn:v:107:y:2012:i:2:p:129-140
    DOI: 10.1007/s00712-012-0279-3
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    References listed on IDEAS

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    1. Patrick Leoni, 2008. "Market power, survival and accuracy of predictions in financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 189-206, January.
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    1. Leoni, Patrick L., 2013. "Survival in Cournot games," Journal of Mathematical Economics, Elsevier, vol. 49(5), pages 429-434.

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    More about this item

    Keywords

    Market selection hypothesis; Survival; Monopoly competition; Heterogeneous beliefs; G3; D82; D84;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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