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Competing or Colluding in a Stochastic Framework

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  • Adriana Breccia
  • Hector Salgado-Banda
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    Abstract

    This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition.

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    File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0504.pdf
    File Function: First version, 2005
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    Bibliographic Info

    Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0504.

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    Date of creation: Jan 2005
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    Handle: RePEc:bbk:bbkefp:0504

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    Related research

    Keywords: Bargaining; Collusion; Competition; Geometric Brownian Motion; Nash Demand Game; Stackelberg Game;

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    3. Marshall, Robert C & Meurer, Michael J & Richard, Jean-Francois, 1994. "Litigation Settlement and Collusion," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 211-39, February.
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    19. Reiko Aoki & Jin-Li Hu, 1996. "Allocation of Legal Costs and Patent Litigation: A Cooperative Game Approach," Industrial Organization 9612001, EconWPA.
    20. Richard J. Gilbert and Willard K. Tom, 2001. "Is Innovation King at the Antitrust Agencies?: The Intellectual Property Guidelines Five Years Later," Economics Working Papers EC01-301, University of California at Berkeley.
    21. Richard J. Gilbert & Willard K. Tom, 2001. "Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later," Industrial Organization 0106002, EconWPA.
    22. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
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