Template-Type: ReDIF-Paper 1.0
Author-Name: Giacomo Bonanno
Author-Name-First: Giacomo
Author-Name-Last: Bonanno
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Modeling the intensity of competition
Abstract: Within the context of a symmetric duopoly with linear demand and costs, we construct a parameterized family of price-setting games, where the parameter $\gamma\in[0,2]$ measures the degree or intensity of competition; $\gamma = 0$ corresponds to collusion, a particular value of $\gamma$ between 0 and 1 corresponds to the Cournot outcome, $\gamma=1$ corresponds to the Bertrand outcome and, in general, as $\gamma$ increases the intensity of competition increases. All the games within the parameterized family share the same strategic properties. We also construct a parameterized family of quantity-setting games, where the parameter $\beta\in[0,2]$ measures the intensity of competition; $\beta = 0$ corresponds to collusion, $\beta=1$ corresponds to the Cournot outcome and a particular value of $\beta$ between 1 and 2 corresponds to the Bertrand outcome. As $\beta$ increases, the intensity of competition increases. As an example of the potential usefulness of this approach, we show that, contrary to the view first put forward by Schumpeter (but later challenged by Arrow), the incentive to introduce a cost-reducing innovation is an increasing function of the intensity of competition (that is, an increasing function of $\gamma$ in the price-setting case and of $\beta$ in the quantity-setting case).
Length: 20
File-URL: https://repec.dss.ucdavis.edu/files/lp3bjtvbtia0qhe1jwy89avmsw8q/CompetitionWP.pdf
File-Format: application/pdf
Number: 381
Classification-JEL: C7, L0, D4
KeyWords: Cournot game, Bertrand game, price competition, quantity competition, strategic substitute, strategic complement, degree of competition
Creation-Date: 20260527
Handle: RePEc:cda:wpaper:381