The Dynamics of Bertrand Price Competition with Cost-Reducing Investments

TY - JOUR

T1 - The Dynamics of Bertrand Price Competition with Cost-Reducing Investments

AU - Iskhakov, Fedor

AU - Rust, John

AU - Schjerning, Bertel

N1 - Lead Article

PY - 2018/11/13

Y1 - 2018/11/13

N2 - 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.

AB - 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.

U2 - 10.1111/iere.12317

DO - 10.1111/iere.12317

M3 - Journal article

SN - 0020-6598

VL - 59

SP - 1681

EP - 1731

JO - International Economic Review

JF - International Economic Review

IS - 4

ER -