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Competing or Colluding in a Stochastic Framework

Author

Listed:
  • Adriana Breccia
  • Hector Salgado-Banda

Abstract

This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition.

Suggested Citation

  • Adriana Breccia & Hector Salgado-Banda, 2005. "Competing or Colluding in a Stochastic Framework," Birkbeck Working Papers in Economics and Finance 0504, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:0504
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    File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0504.pdf
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    References listed on IDEAS

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    Cited by:

    1. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.

    More about this item

    Keywords

    Bargaining; Collusion; Competition; Geometric Brownian Motion; Nash Demand Game; Stackelberg Game;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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