Competing or Colluding in a Stochastic Framework

Adriana Breccia and Hector Salgado-Banda

No 504, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition.

Keywords: Bargaining; Collusion; Competition; Geometric Brownian Motion; Nash Demand Game; Stackelberg Game (search for similar items in EconPapers)
JEL-codes: C7 D8 K4 L13 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-com, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://eprints.bbk.ac.uk/id/eprint/27052 First version, 2005 (application/pdf)

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