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Dynamic analysis of discontinuous best response with innovation

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  • Lamantia, Fabio
  • Pezzino, Mario
  • Tramontana, Fabio

Abstract

Starting from the static analysis in Eckert et al. (2017), 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 rivals level of output are crucial in defining the configuration of the long run equilibrium.

Suggested Citation

  • Lamantia, Fabio & Pezzino, Mario & Tramontana, Fabio, 2018. "Dynamic analysis of discontinuous best response with innovation," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 120-133.
    • Handle: RePEc:eee:dyncon:v:91:y:2018:i:c:p:120-133
    DOI: 10.1016/j.jedc.2018.01.024
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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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    More about this item

    Keywords

    Process innovation; Oligopolistic competition; Discontinuous best response functions; Global analysis; Learning;
    All these keywords.

    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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