THE DYNAMICS OF BERTRAND PRICE COMPETITION WITH COST‐REDUCING INVESTMENTS. (27th August 2018)

• Record Type: Journal Article
• Authors: Iskhakov, Fedor; Rust, John; Schjerning, Bertel
• Is Part Of: International economic review. Volume 59:Number 4(2018:Nov.)
• Page Start: 1681
• Page End: 1731
• Publication Date: 2018-08-27
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1111/iere.12317
• Languages: English
• ISSNs: 0020-6598

Abstract

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.