The Dynamics of Bertrand Price Competition with Cost‐Reducing Investments

51 Pages Posted: 14 Nov 2018

See all articles by Fedor Iskhakov

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

John Rust

Department of Economics, Georgetown University

Bertel Schjerning

University of Copenhagen - Department of Economics

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Date Written: November 2018

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.

Suggested Citation

Iskhakov, Fedor and Rust, John and Schjerning, Bertel, The Dynamics of Bertrand Price Competition with Cost‐Reducing Investments (November 2018). International Economic Review, Vol. 59, Issue 4, pp. 1681-1731, 2018. Available at SSRN: https://ssrn.com/abstract=3283994 or http://dx.doi.org/10.1111/iere.12317

Fedor Iskhakov (Contact Author)

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6 Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

John Rust

Department of Economics, Georgetown University ( email )

Washington, DC 20057
United States
1-202-687-6806 (Phone)
1-202-687-6102 (Fax)

Bertel Schjerning

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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