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THE DYNAMICS OF BERTRAND PRICE COMPETITION WITH COST‐REDUCING INVESTMENTS
Author(s) -
Iskhakov Fedor,
Rust John,
Schjerning Bertel
Publication year - 2018
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12317
Subject(s) - markov perfect equilibrium , duopoly , economics , bertrand competition , mathematical economics , leapfrogging , monopoly , microeconomics , stochastic game , bertrand paradox (economics) , competition (biology) , subgame perfect equilibrium , markov chain , cournot competition , mathematics , oligopoly , nash equilibrium , ecology , biology , economic growth , statistics
We extend the classic Bertrand duopoly model of price competition to a dynamic setting where competing duopolists invest in a stochastically improving production technology to “leapfrog” their rival and attain temporary low‐cost leadership. We find a huge multiplicity of Markov‐perfect equilibria (MPE) and show that when firms move simultaneously the set of all MPE payoffs is a triangle that includes monopoly payoffs and a symmetric zero mixed strategy payoff. When firms move asynchronously, the set of MPE payoffs is strictly within this triangle, but there still is a vast multiplicity of MPE, most of which involve leapfrogging.