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The Dynamics Of Bertrand Price Competition With Cost‐Reducing Investments

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  • Fedor Iskhakov
  • John Rust
  • Bertel Schjerning

Abstract

We extend the classic Bertrand duopoly model of price competition to a dynamic setting where competing duopolists invest in a stochastically improving production technology to “leapfrog” their rival and attain temporary low‐cost leadership. We find a huge multiplicity of Markov‐perfect equilibria (MPE) and show that when firms move simultaneously the set of all MPE payoffs is a triangle that includes monopoly payoffs and a symmetric zero mixed strategy payoff. When firms move asynchronously, the set of MPE payoffs is strictly within this triangle, but there still is a vast multiplicity of MPE, most of which involve leapfrogging.

Suggested Citation

  • Fedor Iskhakov & John Rust & Bertel Schjerning, 2018. "The Dynamics Of Bertrand Price Competition With Cost‐Reducing Investments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 1681-1731, November.
    • Handle: RePEc:wly:iecrev:v:59:y:2018:i:4:p:1681-1731
    DOI: 10.1111/iere.12317
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    Cited by:

    1. Jacob Seifert, 2015. "Welfare effects of compulsory licensing," Journal of Regulatory Economics, Springer, vol. 48(3), pages 317-350, December.
    2. Ulrich Doraszelski & Kenneth L. Judd, 2019. "Dynamic stochastic games with random moves," Quantitative Marketing and Economics (QME), Springer, vol. 17(1), pages 59-79, March.
    3. Fedor Iskhakov & John Rust & Bertel Schjerning, 2016. "Recursive Lexicographical Search: Finding All Markov Perfect Equilibria of Finite State Directional Dynamic Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 658-703.
    4. Ronald Goettler & Brett Gordon, 2014. "Competition and product innovation in dynamic oligopoly," Quantitative Marketing and Economics (QME), Springer, vol. 12(1), pages 1-42, March.
    5. Doraszelski, Ulrich & Escobar, Juan F., 2019. "Protocol invariance and the timing of decisions in dynamic games," Theoretical Economics, Econometric Society, vol. 14(2), May.

    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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