Partial commitment in an endogenous timing duopoly
journal contributionposted on 10.01.2019, 10:07 by Ilkka Leppanen
A duopoly game with timing announcements endogenizes the sequence of commitments. In duopolistic price competition, endogenous moves lead to a coordination problem with two non-Pareto ranked subgame perfect equilibria (SPEs). In these SPEs both firms prefer followership to leadership. We suggest that a unique SPE can be found if firms use partial commitments to their timing announcements. Using partial commitments, the firms first announce the timing of moves but reserve the option to deviate from this announcement and pay a deviation cost. We show that given a sufficient asymmetry in stochastic production technologies, there exists a unique SPE with sequential moves if the deviation costs are sufficiently different or if a common deviation cost belongs to a suitable interval. We also discuss the information sharing implications of the results and find that information is not shared at the unique SPE.
- Business and Economics