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Dynamic Analysis of Discontinuous Best Response with Innovation

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  • Fabio Lamantia
  • Mario Pezzino

Abstract

We study a Cournot duopoly where firms can decide to incur fixed costs in activities that improve their competitiveness (i.e. product development or process innovation). Innovation costs generate discontinuities in the firms' quantity best response functions and, in turn, a variety of equilibrium configurations, including multiple equilibria. We provide a dynamic global analysis of the equilibria and show the way in which firms' initial expectations regarding the rivalís level of output are crucial in defining the configuration of the long run equilibrium.

Suggested Citation

  • Fabio Lamantia & Mario Pezzino, 2017. "Dynamic Analysis of Discontinuous Best Response with Innovation," Economics Discussion Paper Series 1708, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:1708
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    References listed on IDEAS

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    Cited by:

    1. Lamantia, Fabio & Pezzino, Mario & Scardamaglia, Bruno & Tramontana, Fabio, 2022. "A discontinuous model of duopoly with isoelastic demand and innovation costs," Chaos, Solitons & Fractals, Elsevier, vol. 158(C).

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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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