Selection of Equilibrium in a Dynamic Oligopoly with Cost-Reducing Investments

Abstract

In this paper we analyze an infinite horizon dynamic oligopoly, producing a homogeneous good, with costly changes of output between the periods, and investments affecting marginal costs. The requirement of continuity of strategies and the weakest possible criterion of renegotiation-proofness, called renegotiation-quasi-proofness, are used to select a subset of Markov perfect equilibria with a common limit of continuation equilibrium paths. In each renegotiation-quasi-proof continuous strategy Markov perfect equilibrium, each firm's price and marginal costs converge to common levels that would maximize net profit of each firm if they were infinitely repeated.