Evolution of behavior when duopolists choose prices and quantities

Posted by D. Daniel Sokol

Khan Abhimanyu and Peeters Ronald (METEOR) have posted Evolution of behavior when duopolists choose prices and quantities.

ABSTRACT: We study duopolistic competition in a differentiated market with firms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of profit maximizing firms, we assume firm behavior to be shaped by a Darwinian dynamic: the less fitter firm imitates the fitter firm and occasionally firms may experiment with a random price and/or quantity. Our two main findings are that: (i) a market clearing outcome always belongs to the set of feasible long run outcomes, but may co-exist with non-market clearing outcomes with as well excess supply as excess demand being possible; and (ii) there exist parameter configurations for which the only feasible outcomes imply prices above monopoly level.