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Stackelberg leadership in a dynamic duopoly with stochastic capital accumulation

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  • Luca Lambertini

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Abstract

I propose a dynamic duopoly model where firms enter simultaneously but compete hierarchically á la Stackelberg at each instant over time. They accumulate capacity through costly investment, with capital accumulation dynamics being affected by an additive shock the mean and variance of which are known. The main findings are the following. First, the Stackelberg game is uncontrollable by the leader; hence, it is time consistent. Second, the leader invests more than the follower; as a result, in the steady state, the leader’s capacity and profits are larger than the follower’s. Therefore, the present analysis does not confirm Gibrat’s Law, since the individual growth rate is determined by the timing of moves. Copyright Springer-Verlag Berlin/Heidelberg 2005

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Bibliographic Info

Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 15 (2005)
Issue (Month): 4 (October)
Pages: 443-465

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Handle: RePEc:spr:joevec:v:15:y:2005:i:4:p:443-465

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Related research

Keywords: Differential games; Time consistency; Investment; Optimal control methods; Stackelberg equilibrium;

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Cited by:
  1. D. Dragone & L. Lambertini & G. Leitmann & A. Palestini, 2009. "A Stochastic Optimal Control Model of Pollution Abatement," Working Papers 681, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. L. Lambertini, 2005. "Dynamic Oligopoly ˆ la Stackelberg with Stochastic Capital Accumulation," Working Papers 547, Dipartimento Scienze Economiche, Universita' di Bologna.

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