Reaction curves

A reaction curve RC, also called reaction function or best-reply function, is the locus of optimal, i.e. profit-maximizing, actions that a firm may undertake for any given action chosen by a rival firm. The RC diagram is the standard tool for the graphical analysis of duopoly. In the diagram the market equilibrium is at the intersection of the RCs, one for each firm. The commonest case of RC diagram is that of the Cournot duopoly model.reaction curves; duopoly; Cournot

Leading and losing the tax competition race

In this paper we extend the standard approach of horizontal tax competition by endogenizing the timing of decisions made by the competing jurisdictions. Following the literature on the endogenous timing in duopoly games, we consider a pre-play stage, where jurisdictions commit themselves to move early or late, i.e. to fix their tax rate at a first or second stage. We highlight that at least one jurisdiction experiments a second-mover advantage. We show that the Subgame Perfect Equilibria (SPEs) correspond to the two Stackelberg situations yielding to a coordination problem. In order to solve this issue, we consider a quadratic specification of the production function, and we use two criteria of selection: Pareto-dominance and risk-dominance. We emphasize that at the safer equilibrium the less productive or smaller jurisdiction leads and hence loses the second-mover advantage. If asymmetry among jurisdictions is sufficient, Pareto-dominance reinforces Risk-dominance in selecting the same SPE. Three results may be deduced from our analysis: (i) the race to the bottom is less severe than predicted; (ii) the smaller jurisdiction leads; (iii) the `big-country-higher-tax-rate' rule does not always hold.Endogenous timing, tax competition, first/second-mover advantage, Strategic Complements, Stackelberg, Risk dominance.

SELF-ENFORCING INTERNATIONAL ENVIRONMENTAL AGREEMENTS REVISITED

In Barrett's (1994) paper on transboundary pollution abatement is shown that if the signatories of an international environmental agreement act in a Stackelberg fashion, then, depending on parameter values, a self-enforcing IEA can have any number of signatories between two and the grand coalition. Barrett obtains this result using numerical simulations and also ignoring the fact that emissions must be non-negative. Recent attempts to use analytical approaches and to explicitly recognize the non-negativity constraints have suggested that the number of signatories of a stable IEA may be very small. The way such papers have dealt with non-negativity constraints is to restrict parameter values to ensure interior solutions for emissions. We argue that a more appropriate approach is to use Kuhn-Tucker conditions to derive the equilibrium of the emissions game. When this is done we show, analytically, that the key results from Barrett's paper go through. Finally, we explain why his main conclusion is correct although his analysis can implicitly imply negative emissions.international externalities, self-enforcing environmental agreements, Stackelberg equilibrium, non-negative emissions constraints

Non-competitive markets

Among all the paradigms in economic theory, the theoretical predictions of oligopoly were the first to be examined in the laboratory. In this chapter, instead of surveying all the experiments with few sellers, we adopt a narrower definition of the term “oligopoly”, and focus on the experiments that were directly inspired by the basic oligopolistic models of Cournot, Bertrand, Hotelling, Stackelberg, and some extensions. Most of the experiments we consider in this chapter have been run in the last three decades. This literature can be considered as a new wave of experimental works aiming at representing basic oligopolistic markets and testing their properties. The chapter is divided into independent sections referring to different parts of the oligopolistic theory, including both monopoly as well as a number of extensions of the basic models, which have been chosen with the aim of providing a representative list of the relevant experimental findings

The Effects of Information on Strategic Investment and Welfare

A model is considered where two firms compete in investing in a risky project. At certain points in time the firms obtain imperfect information about the profitability of the project. We impose that investing first can be beneficial because a Stackelberg advantage, and thus a higher market share, is obtained. On the other hand, investing as second implies that one can benefit from an information spillover generated by the investment of the other firm. Consequently, in equilibrium there is either a preemption situation or a war of attrition. In case no investment takes place during the war of attrition, this war of attrition can turn into a preemption situation. One counterintuitive result is that welfare can be negatively affected by signals becoming more informative or by occuring more frequently. Furthermore, simulations indicate that duopoly leads to higher welfare than monopoly when signals are less informative, wheras the opposite holds if there is more or better information.

Strategic Delegation and the Shape of Market Competition

Which shape market competition is likely to exhibit? This question is addressed in the present paper, where firms can choose whether to act as quantity or price setters, whether to move early or delay as long as possible at the market stage and finally whether to be entrepreneurial or managerial. Moreover, firms can endogenously determine the sequence of such decisions. It is shown that in correspondence of the (unique) subgame perfect equilibrium of the game, all firms first decide to delay, then to act as Cournot competitors, and finally stockholders decide to delegate control to managers. Hence, sequential play between either managerial or entrepreneurial firms, as well as simultaneous play between entrepreneurial firms are ruled out

A Puzzle About Economic Explanation: Examining the Cournot and Bertrand Models of Duopoly Competition

Economists use various models to explain why it is that firms are capable of pricing above marginal cost. In this paper, we will examine two of them: the Cournot and Bertrand duopoly models. Economists generally accept both models as good explanations of the phenomenon, but the two models contradict each other in various important ways. The puzzle is that two inconsistent explanations are both regarded as good explanations for the same phenomenon. This becomes especially worrisome when the two models are offering divergent policy recommendations. This report presents that puzzle by laying out how the two models contradict each other in a myriad of ways and then offers five possible solutions to that puzzle from various economists, philosophers of science, and philosophers of economics