Learning Dynamics in the Cobweb Model with Heterogeneous Producers

Abstract

In this study we investigate the nonlinear dynamics of the traditional cobweb model with two types of heterogeneous producers who are risk averse and seek to learn the distribution of asset prices, in terms of the sample mean and variance of historical prices, using the Arithmetic Learning Processes (ALP) over different window lengths. We show that heterogeneity has a double edged effect on the dynamics in the sense that heterogeneous learning can stabilize an otherwise unstable dynamics in some cases and destablize an otherwise stable dynamics in other cases as well. When the steady state becomes unstable, the model displays complicated dynamics through a variety of types of bifurcations.