Abstract
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 at the MPE depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether at the MPE there is intertemporal strategic substitutability or complementarity. A full characterization is provided in the linear-quadratic case. Then with price competition and costly production adjustment, static strategic complementarity turns into intertemporal strategic substitutability and the MPE steady-state outcome is more competitive than static Bertrand competition.
Original language | English |
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Pages (from-to) | 249-281 |
Number of pages | 33 |
Journal | Journal of Economic Theory |
Volume | 116 |
Issue number | 2 |
DOIs | |
Publication status | Published - 2004 Jun |
Keywords
- Adjustment costs
- Differential game
- Markov equilibrium
- Stackelberg
ASJC Scopus subject areas
- Economics and Econometrics