Journal Article

A Perpetual Race to Stay Ahead

Johannes Hörner

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 4, pages 1065-1088
Published in print October 2004 | ISSN: 0034-6527
Published online October 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00314
A Perpetual Race to Stay Ahead

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  • Technological Change; Research and Development
  • Game Theory and Bargaining Theory
  • Market Structure, Firm Strategy, and Market Performance

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This paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity. The state of competition—measured by the difference between the number of innovations introduced by the firms—evolves stochastically according to their effort level. The structure of Markov perfect equilibria is identified. It is generally not true that competition is fiercest when firms are closest. Rather, firms invest under two distinct circumstances: while sufficiently ahead, to outstrip their rival and secure a durable leadership; while behind, to regain leadership and prevent the situation from worsening to the point where their rival outstrips them.

Keywords: C72; L13; O31; O32

Journal Article.  15550 words.  Illustrated.

Subjects: Technological Change; Research and Development ; Game Theory and Bargaining Theory ; Market Structure, Firm Strategy, and Market Performance

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