Entry, Exit, and Technological Progress in Markov-Perfect Duopoly

Jaap Abbring, Jeffrey Campbell and Nan Yang

No 22071, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper establishes the existence and essential uniqueness of an intuitively refined Markov-perfect equilibrium in a duopoly game with sunk costs, barriers to entry, firm-specific technological progress, and irreversible exit. We develop an algorithm that quickly computes the equilibrium by solving for fixed points of a finite sequence of auxiliary contraction mappings, which we label Fake Backward Induction. We illustrate the game’s practical value with a quantitative analysis of competition policy in a stochastically growing market with firms idiosyncratically learning by aging. Computing one equilibrium of this example takes 10.2 seconds on one Apple M5 Pro core.

Keywords: Sunk costs; Barriers to entry; equilibrium uniqueness; Fake Backward Induction; Competition policy (search for similar items in EconPapers)
JEL-codes: C63 C73 L13 (search for similar items in EconPapers)
Date: 2026-10
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