A stochastic differential game of duopolistic competition with sticky prices

Luca Colombo and Paola Labrecciosa

Journal of Economic Dynamics and Control, 2021, vol. 122, issue C

Abstract: In this paper, we present a stochastic differential game model of duopolistic competition with sticky prices, which extends the model analyzed in the seminal paper by Fershtman and Kamien (1987), and derive analytically a feedback Nash equilibrium of the game. Uncertainty is modelled by means of a Wiener process affecting the evolution of the price. We show that the expected price converges to a level that can be either higher or lower than the deterministic stationary price, depending on market size. We also show that uncertainty is beneficial to firms in terms of long-run expected profits and may be beneficial to firms in terms of discounted expected profits, depending on market size as well. Furthermore, we show that the long-run stationary probability density of the market price can be computed explicitly.

Keywords: Stochastic differential games; Markov Perfect Equilibrium; Oligopoly; Cournot competition; Sticky prices (search for similar items in EconPapers)
JEL-codes: C73 D43 L13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:122:y:2021:i:c:s0165188920301986

DOI: 10.1016/j.jedc.2020.104030

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