Technology Ladders and R&D in Dynamic Cournot Markets

32 Pages Posted: 17 Jun 2015

See all articles by Michael Ludkovski

Michael Ludkovski

University of California, Santa Barbara

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering

Date Written: June 17, 2015

Abstract

We explore optimal investment in Research and Development activities among producers in a competitive market. R&D effort is costly and results in discrete technological advances that gradually lower production costs. The aggregate cost profile is thus expressed as a stochastic multi-dimensional counting process, individually controlled by the players.

Our model combines features of patent racing with dynamic market structure, capturing the interplay between the immediate competition in terms of production rates and the long-term competition in R&D.

Using a Cournot model of competition with substitutable goods (e.g. markets for different energy commodities) we analyze the resulting Markov Nash equilibrium which reduces to analysis of a sequence of the one-step static games arising between R&D successes. Several numerical examples and extensive analysis of the emerging comparative statics are presented.

Keywords: Cournot markets, R&D innovations, technology ladder, dynamic oligopoly

JEL Classification: D43, O32, C73, L13

Suggested Citation

Ludkovski, Mike and Sircar, Ronnie, Technology Ladders and R&D in Dynamic Cournot Markets (June 17, 2015). Available at SSRN: https://ssrn.com/abstract=2619556 or http://dx.doi.org/10.2139/ssrn.2619556

Mike Ludkovski (Contact Author)

University of California, Santa Barbara ( email )

Santa Barbara, CA 93106
United States

HOME PAGE: http://www.pstat.ucsb.edu/faculty/ludkovski

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering ( email )

Princeton, NJ 08544
United States

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