Book Series
Theories of the Firm
Fifth Edition
Demetri Kantarelis

Appendix V: Stochastic duopoly and learning to cooperate

306-312A technologically-similar quantity-variation duopoly model is proposed in which both firms are willing to cooperate while at the same time each is uncertain about the rival's cooperative desires. Facing such uncertainty each firm is assumed to make cooperative and non-cooperative moves in a random fashion, for a period of time. It is shown: 1 how such duopolists may reach an equilibrium at which the expected payoffs of the stochastic game exceed the non-cooperative payoffs 2 how the firms may learn to move towards the monopoly-sharing equilibrium by going through increasing cooperative trial periods.
1 Introduction
2 A stochastic duopoly game
3 Learning
4 A numerical example
5 Summary and conclusions
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