Strategy and Game Theory by Felix Munoz-Garcia & Daniel Toro-Gonzalez

Author:Felix Munoz-Garcia & Daniel Toro-Gonzalez
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Taking first order conditions with respect to , we have . Solving for , we obtain the firm i’s best response function . (Note that second order conditions also hold, since they are , guarantee that such a price level maximizes firm i’s profit function.)

By symmetry, firm j’s best response function is . Plugging into , we obtain and thus equilibrium prices are and . These prices yield equilibrium profits of:

Nonetheless, the profits that the incumbent earns after including the investment in the cost-reducing technology are

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