Duopoly with Both Ruin and Entry

Robert Rosenthal and Richard H. Spady

Canadian Journal of Economics, 1989, vol. 22, issue 4, 834-51

Abstract: Duopoly is modeled here as a prisoner's dilemma repeated in continuous time. Firms wish to maximize discounted flows of dividend payments, which are paid when capitalization levels permit. A firm is ruined when its capitalization falls below zero, but each ruined firm is immediately replaced by a new entrant. Attempting to ruin a rival is not necessarily an attractive strategy here, since the postentry game against the new rival may be a less favorable one. On the other hand, firms that are close to ruin have little to lose by playing aggressively and, hence, are attractive targets of aggression themselves. Equilibria are constricted that reflect these considerations.

Date: 1989
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