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Incentives in Dynamic Duopoly


  • Jun, Byoung
  • Vives, Xavier


We compare steady states of open loop and locally stable Markov perfect equilibria (MPE) in a general symmetric differential game duopoly model with costs of adjustment. Strategic incentives depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether there is intertemporal strategic substitutability or complementarity at the MPE. Furthermore, we characterize completely strategic incentives in the linear-quadratic specification of the model and find that when production (price) is costly to adjust there is intertemporal strategic substitutability (complementarity) and the steady state of the Markov perfect equilibrium is more (less) competitive than the steady state of the open-loop equilibrium, which coincides with the static outcome. In particular, in a differentiated product duopoly market with price competition and costly production adjustment the leadership attempts by each firm turn into Stackelberg price warfare yielding a MPE steady state outcome more competitive than static Bertrand competition. The static strategic complementarity in the price game is turned into intertemporal strategic substitutability.

Suggested Citation

  • Jun, Byoung & Vives, Xavier, 2001. "Incentives in Dynamic Duopoly," CEPR Discussion Papers 2899, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2899

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    References listed on IDEAS

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    Cited by:

    1. Praveen Kujal & Juan Ruiz, 2003. "Policy Synchronization and Staggering in a Dynamic Model of Strategic Trade," International Trade 0302003, EconWPA.
    2. Gianluigi Vernasca, 2003. "Dynamic Price Competition with Price Adjustment Costs and Product Differentiation," Working Papers 2003.120, Fondazione Eni Enrico Mattei.
    3. Gerda Dewit & Dermot Leahy & Catia Montagna, 2003. "Employment Protection and Globalisation in Dynamic Oligopoly," Dundee Discussion Papers in Economics 137, Economic Studies, University of Dundee.

    More about this item


    adjustment costs; Bertrand; Cournot; differential game; Markov perfect equilibrium; open-loop equilibrium; product differentation; Stackelberg warfare point;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games


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