THE DYNAMICS OF BERTRAND PRICE COMPETITION WITH COST‐REDUCING INVESTMENTS

Fedor Iskhakov, John Rust () and Bertel Schjerning

International Economic Review, 2018, vol. 59, issue 4, 1681-1731

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.

Date: 2018
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https://doi.org/10.1111/iere.12317

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Working Paper: The Dynamics of Bertrand Price Competition with Cost-Reducing Investments (2013)
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