Rational expectations and monopolistic trades

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.