Stability analysis in a Bertrand duopoly with different product quality and heterogeneous expectations
AbstractWe study the local stability properties of a duopoly game with price competition, different product quality and heterogeneous expectations. We show that the Nash equilibrium can loose stability through a flip bifurcation when the consumer’s type range increases. This result occurs irrespective of whether the high(low)-quality firm has either bounded rational (naïve) or naïve (bounded rational) expectations about the price that should be set in the future by the rival to maximise profits. Therefore, although, on the one hand, an increase in the consumer’s types range increases profits, on the other hand, it contributes to reduce the parametric stability region of the unique interior equilibrium. Moreover, we show that the stability region is larger when the high-quality firm has naïve expectations and the low-quality firm has bounded rational expectations. This implies that when the expectations formation mechanism of the high-quality firm becomes more complicated than the naïve one, and, in particular, it follows the mechanism proposed by Dixit (1986), the stability of the Nash equilibrium in a duopoly market with price competition becomes under increasing strain.
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Bibliographic InfoPaper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2011/122.
Date of creation: 09 Jan 2011
Date of revision:
Bifurcation; Different product quality; Duopoly; Heterogeneous players; Price competition.;
Other versions of this item:
- Luciano Fanti & Luca Gori, 2013. "Stability Analysis in a Bertrand Duopoly with Different Product Quality and Heterogeneous Expectations," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 481-501, December.
- Fanti, Luciano & Gori, Luca, 2011. "Stability analysis in a Bertrand duopoly with different product quality and heterogeneous expectations," MPRA Paper 33480, University Library of Munich, Germany.
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-BEC-2011-10-15 (Business Economics)
- NEP-COM-2011-10-15 (Industrial Competition)
- NEP-IND-2011-10-15 (Industrial Organization)
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