Dynamic analysis of discontinuous best response with innovation

Fabio Lamantia, Mario Pezzino, Fabio Tramontana

Research output: Working paper

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 rival's level of output are crucial in defining the configuration of the long run equilibrium.
Original languageEnglish
Number of pages32
Publication statusPublished - 2017

Publication series

NameSSRN Working Paper

Keywords

  • Discontinuous best response functions
  • Global analysis
  • Learning
  • Process Innovation

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