Abstract
This paper studies firms’ dynamic interaction in a Cournot market. In each period of the game, the firm decides whether to make a stochastic positioning investment (establishing or maintaining its position in market competition). The market demand is also stochastic (high or low). By adopting symmetric Market perfect Nash equilibrium, firms choose strategies to maximize the discounted present value of cash flow. By considering the cases with one, two, and three active firms in the market, respectively, we present the stage game market outcome, show the transition probabilities, find the steady state of the system, and discuss the speed of convergence. Our work allows for two types of uncertainty in firms’ interactions, which contribute to the dynamic oligopoly literature.
Highlights
Competition for an OligopolisticIn the business world, the dynamic interaction among firms is common
Our model is based on the symmetric Markov perfect Nash equilibrium (SMPNE), in which the firms make their positioning investment strategy first and the quantity strategy
This paper elaborates the dynamic interaction in a Cournot market
Summary
The dynamic interaction among firms is common. To be specific, the market demand and the firms’ investment decision both involve uncertainty. Our model is based on the symmetric Markov perfect Nash equilibrium (SMPNE), in which the firms make their positioning investment strategy first and the quantity strategy. The stochastic uncertainty lies in the dimension of firms’ positioning investment strategy and in the dimension of market demand, making the model more realistic and more technically challenging. Another innovation is that we focus on output competition rather than price competition (Lian and Zheng, 2019) [2] and enrich the literature on firms’ dynamic interaction under different market structures.
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