A Schumpeterian Model of Duopolistic Competition

(with Giuliano Preparata)

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ABSTRACT: This paper models the dynamics of technological change through the competitive interaction of two firms. Specifically, the duopolists strive to outperform each other by exploiting the two fundamental Schumpeterian forces of economic development. Innovation and imitation. The demand curve for the market as a whole is divided between the two rivals in inverse proportion to each producer’s cost of production (competitiveness). A key methodological aspect of our microeconomics is that we eschew entirely the absurd postulate of rational expectations. As well as the concomitant figment of an impersonal profit-maximizing process driving the interaction.

In sum, by extending over a number of periods Dosi’s limit-pricing model (whereby the ‘learning-by-doing effect’ is the source of the barrier to entry) and assuming that the two firm compete —following one another in the roles of innovator and imitator— it is possible to trace out the patterns followed by the market shares of both producers. And, finally, to derive endogenously a unit cost curve characterizing the industry in the long run (31 pp).

Unpublished (1992)

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