The Dynamics of Bertrand Price Competition with Cost-Reducing Investments

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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.
Original languageEnglish
JournalInternational Economic Review
Issue number4
Pages (from-to)1681-1731
Publication statusPublished - 13 Nov 2018

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ID: 147222266