Dynamic Duopoly Theory and Rational Expectations

The determination of equilibrium prices and quantities in an oligopolistic market has been a troublesome problem for economic theory# The intrinsic nature of the problem is the interdependence of firms - the profit level of any firm depends upon not only aggregate demand and its own output level, but also on the output level of other firms. Thus, each firm, in choosing its own output level, needs to make some behavioral assumption —or conjecture - about how other firms will respond to these changes in output