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 depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether there is intertemporal strategic substitutability or complementarity at the MPE. Furthermore, we characterize completely strategic incentives in the linear-quadratic specification of the model and find that when production (price) is costly to adjust there is intertemporal strategic substitutability (complementarity) and the steady state of the Markov perfect equilibrium is more (less) competitive than the steady state of the open-loop equilibrium, which coincides with the static outcome. In particular, in a differentiated product duopoly market with price competition and costly production adjustment the leadership attempts by each firm turn into Stackelberg price warfare yielding a MPE steady state outcome more competitive than static Bertrand competition. The static strategic complementarity in the price game is turned into intertemporal strategic substitutability.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2899.
Find related papers by JEL classification: C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Deneckere, Raymond J & Kovenock, Dan, 1992.
"Price Leadership,"
Review of Economic Studies,
Blackwell Publishing, vol. 59(1), pages 143-62, January.
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Raymond Deneckere & Dan Kovenock, 1988.
"Price Leadership,"
Discussion Papers
773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]
Davidson, Carl & Deneckere, Raymond J, 1990.
"Excess Capacity and Collusion,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
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Carl Davidson & Raymond Deneckere, 1984.
"Excess Capacity and Collusion,"
Discussion Papers
675, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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