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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Incentives
Markov perfect equilibrium
Dynamic duopoly
Substitutability
Strategic complementarity
Price competition
Differential games
Costs
Bertrand competition
Duopoly
Complementarity
State variable

Keywords

  • Adjustment costs
  • Differential game
  • Markov equilibrium
  • Stackelberg

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Strategic incentives in dynamic duopoly. / Jun, Byoung Heon; Vives, Xavier.

In: Journal of Economic Theory, Vol. 116, No. 2, 01.06.2004, p. 249-281.

Research output: Contribution to journalArticle

Jun, Byoung Heon ; Vives, Xavier. / Strategic incentives in dynamic duopoly. In: Journal of Economic Theory. 2004 ; Vol. 116, No. 2. pp. 249-281.
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