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Evolution of behavior when duopolists choose prices and quantities

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Working paper
Author/s: 
Abhimanyu Khan and Ronald Peeters
Issue number: 
RM/11/027
Publisher: 
Maastricht University
Year: 
2011
We study duopolistic competition in a di erentiated market with rms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of pro t maximizing rms, we assume rm behavior to be shaped by a Dar-winian dynamic: the less tter rm imitates the tter rm and occasionally rms may experiment with a random price and/or quantity. Our two main ndings 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 con gurations for which the only feasible outcomes imply prices above monopoly level.
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