Bertel Schjerning publishes in International Economic Review
The paper forthcoming in International Economic Review is titled “The Dynamics of Bertrand Price Competition with Cost-Reducing Investments” and is joint work with Fedor Iskhakov (Australian National University) and John Rust (Georgetown University).
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.