Treball de Fi de Grau en Economia. Curs 2018-2019

Rules of thumb, deviations from the standard objective functions, or explicit cognitive bounds have been introduced in Industrial Organization to tackle irrationality. At the same time, a considerable literature has been extending level-k since Nagel (1995), but little has been done on its application outside experimental settings. To address this we define a model of boundedly rationality and we apply it to a Cournot competition game, finding that the accuracy of anticipation and the distribution of level 0 players’ action play a critical role in explaining which firms become larger in dynamic settings.