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Dynamic Analysis of Discontinuous Best Response with Innovation

Fabio Lamantia and Mario Pezzino ()

Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: We study a Cournot duopoly where firms can decide to incur fixed costs in activities that improve their competitiveness (i.e. product development or process innovation). Innovation costs generate discontinuities in the firms' quantity best response functions and, in turn, a variety of equilibrium configurations, including multiple equilibria. We provide a dynamic global analysis of the equilibria and show the way in which firms' initial expectations regarding the rivalís level of output are crucial in defining the configuration of the long run equilibrium.

JEL-codes: C73 D21 D43 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-com, nep-cse and nep-ino
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