Strategic incentives in dynamic duopoly

Byoung Heon Jun, Xavier Vives

Research output: Contribution to journalArticle

53 Citations (Scopus)

Abstract

We compare steady states of open loop and locally stable Markov perfect equilibria (MPE) in a general symmetric differential game duopoly model with costs of adjustment. Strategic incentives at the MPE depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether at the MPE there is intertemporal strategic substitutability or complementarity. A full characterization is provided in the linear-quadratic case. Then with price competition and costly production adjustment, static strategic complementarity turns into intertemporal strategic substitutability and the MPE steady-state outcome is more competitive than static Bertrand competition.

Original languageEnglish
Pages (from-to)249-281
Number of pages33
JournalJournal of Economic Theory
Volume116
Issue number2
DOIs
Publication statusPublished - 2004 Jun 1

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Keywords

  • Adjustment costs
  • Differential game
  • Markov equilibrium
  • Stackelberg

ASJC Scopus subject areas

  • Economics and Econometrics

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