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Proceedings oI International ConIerence on Computing Sciences

WILKES100 ICCS 2013


ISBN: 978-93-5107-172-3
Equilibrium in non-linear diIIerentiated duopoly
Bharti Kapoor
1*
and Amanpreet Singh
2
1
Research Scholar Punjab Technical University Jalandhar (Punjab) India
2
Department of Applied Science Institute of Engineering and Technology (Ropar) India
Abstract
The oligopoly market may either result in high prices and less production somewhat like in monopoly, or sometimes
competition in the Iirms may result in low price and high production. Here advertisement plays an important role. Duopoly
may be considered as a subset oI oligopoly. II both players are producing similar commodities, it will be called pure
duopoly, iI there is some diIIerence in their products it is called diIIerential duopoly. In particular, we consider diIIerentiated
products and Iocus on the dynamic role played by the degree oI product diIIerentiation. Here we discuss duopoly game in
which we have two types oI players who use diIIerent strategies called heterogeneous expectations to maximize their proIit.
Players can use simple strategies known as nave expectations also. But that is possible iI players have perIect knowledge oI
market and rival Iirms strategies, which is not possible in real liIe situations. So players use practical approach, they try to use
inIormation oI estimates oI marginal proIit available to them. Such players in duopoly game are called rational players. They
increase their production iI the marginal proIit increases and vice versa. So production at time
( ) 1 + t
oI bounded rational
player is determined by marginal proIit at time
'. ' t
2013 Elsevier Science. All rights reserved.
Keywords: Duopoly, Nash Equilibrium, Differentiated Products
1. Introduction
The oligopoly market is controlled by Iew Iirms which produce homogeneous products. In oligopoly market
decisions oI one Iirm inIluence the decision oI other Iirm. L.Fanti,L.Gori analyse the dynamics oI a Cournot
duopoly with in the Iramework developed by the Bischi et al.(2010) , that studies the dynamics oI oligopoly
models based on expectations diIIerent Irom the simple nave Iormation mechanism implicit in the original model
by Cournot . While Cournot considers a duopoly with a single homogenous product, Dixit (1979) and Singh et el.
(1984), oIIered duopoly models with diIIerentiated products, which allow goods and services to be substitutes or
complements, in models with a standard linear demand structure. Leonard and Nishimura, (1999); Den
Haan,(2001); Agiza et al.,(2002); Agiza and Elsadany, (2003), (2004);
Zhang et al., (2007) Tramontana,(2010) assume that there exist Iirms, which are assumed to have heterogeneous
expectations.
2. Model
Here we present duopoly game with two players having heterogeneous expectations with the help oI a non-
linear map. II
i
s is the supply oI Iirm i , where 2 , 1 = i .Then proIit oI the Iirm is given by
i
( )
j i
s s p + =
i i i
s c s
(1)
Where p is non increasing twice diIIerentiable inverse demand Iunction and
i i
s c is increasing cost Iunction oI
Iirm i. Now price in market depends on the supply oI product. There happens inverse relation between price and
supply. II total supply in the market is ( ) t s ( ) t s
1
( ) t s
2
+ ,where ( ) t s
i
is supply oI i
th
Iirm at time ' ' t .Then
s a a p
2 1
= where
2 1
, a a are positive constants.
Then Irom (1), ProIit oI i
th
Iirm is given by
( )
i i i i
s c s S a a =
2 1

473 Elsevier Publications, 2013


*
Corresponding author. Bharti Kapoor
Bharti Kapoor

and Amanpreet Singh

2 , 1 = i
( )
i i i j i i
s c s s a s a a e i =
2 2 1
. . 2 , 1 = i
( =
i i
s a e i
1
. . )
i i j i i
s c s s a s a
2
2
2
j i i = 2 , 1
Then the marginal proIit oI the i
th
Iirm is given by
i j i
i
i
c s a s a a
s
=

2 2 1
2

(2)
This optimization problem has a unique solution in the Iorm
0 2
2 2 1
=
i j i
c s a s a a
( )
i j i
c s a a
a
s e i =
2 1
2
2
1
. . j i i = 2 , 1 (3)
Since the production oI bounded rational player at time (t1) depends upon the marginal proIit at time t`. So,
production oI bounded rational player at time (t1) is given by
( ) ( ) ( )
i
i
i i i i
s
t s t s t s

+ = +

1 j i i = 2 , 1 (4)
i.e. ( ) ( ) ( )( + = +
j i i i i i
s a s a a t s t s t s
2 2 1
2 1 )
i
c j i i = 2 , 1 (5)
where
i
is positive parameter which represent speed oI adjustment. (Using eq. no.(2)
3. Model for Nave Expectations
II both the Iirms are nave players i.e. they use simple strategies then output and proIit oI each Iirm depends upon
rival Iirm`s output and every player make expectation oI rival Iirm`s output, so that they may take decisions
about the output oI their Iirm accordingly to maximize their proIit.
II is the production oI Iirm ' ' i , where i 1,2.at time ' ' t .Then production at time ( ) 1 + t is determined by
solving optimization problem given as Iollows:
( ) ( ) ( )
( ) ( ) ( ) ( )

+ = +
+ = +
t s t s t s
t s t s t s
e
s
e
s
2 1 2 2
2 1 1 1
, 1 max arg 1
1 , max arg ) 1 (
2
1

The solution oI the optimization problem can be expressed as ( ) ( ) ( ) t s f t s


2 1
1 = +
and ( ) ( ) ( ) t s g t s
1 2
1 = +
So, the duopoly game in case oI homogeneous expectations or nave expectations is described by
( ) ( )
2 1 2 1
, , s s s s F = ,where ( ) ( ) 1 , 1
2
'
2 1
'
1
+ = + = t s s t s s

( )
( )

=
=
1 2
2 1
: . .
s g s
s f s
F e i (6)
Hence duopoly game in case oI nave expectations is represented by eq. no. (6) . which has linear Iorm and the
Nash-equilibrium asymptotically stable. Equilibrium oI duopoly game oI two players having nave expectations
are obtained by Iixed points oI map given above which is intersection oI reaction Iunction ( )
2 1
s f s = and
( )
1 2
s g s = is called Cournot Nash equilibrium. Because we are considering duopoly game where each player
has diIIerent strategy i.e. heterogeneous expectations to maximize his proIit who produces homogeneous
products, here we take that Iirst Iirm or player is bounded rational player and other is nave.
( )
i i i j i i
s c s s s a a e i + = ) ( . .
2 1

474 Elsevier Publications, 2013


Equilibrium in non-linear differentiated duopoly

Hence the duopoly game with heterogeneous players producing homogeneous products is described by two-
dimensional non-linear map:
) (
) (

=
+ =
2 1 2 1
2
'
2
2 2 1 2 1 1 1 1
'
1
2
1
2
:
c s a a
a
s
s a s a c a s s s
F

(A)
Till here we studied the model oI duopoly game with two players where one is boundedly rational and other is
naive but producing single homogeneous products.
4. Model of Duopoly Game Producing Differentiated Products
Now, we will describe the model oI duopoly game with two players with heterogeneous expectations, but
producing diIIerentiated goods and services. It will reveal the Iact that more product diIIerentiation may
destablise the unique Cournot-Nash equilibrium. It may also result in an increase in proIit and can also reduce
market size. Let us consider a duopoly market with two players(Iirms),every player (Iirm)produces diIIerentiated
goods and services whose prices and quantities are considered respectively with 2 , 1 = i .In addition to
duopolistic sector ,a competitive sector that produces the numeraire good z exists.
The representative consumer which has preIerences over y and z represented by separable utility Iunction V(y, z)
T(y)z with respect to quantities subject to budget constraint N z y x y x = +
2 2 1 1
, where N is consumer`s
given income and ) , ( , ) , (
2 1 2 1
y y y x x x = = are nonnegative. The preIerences oI representative
consumer over y are given by:
( ) ( )
j i j j i i j j i i j i
y dy y b y b y a y a y y T 2
2
1
,
2 2
+ + + =
where -1 d 1 represents the degree oI horizontal product diIIerentiation. II 0 = d then goods and services
oI variety 1 and 2 are independent , and Iirms behave as a monopolist in its own market. II 1 = d then goods 1
and 2 are perIect substitutes or alternative oI each other. II 1 = d

then goods are complement oI each other. II
1 0 < < d ,then degree oI substitutability increases as the parameter d` raises its value and vice versa.
Here we assume that a a a
j i
= = and 1 = =
j i
b b because II
j i
a a then a demand asymmetry between
the Iirms exists which implies the quality diIIerence between the goods and services supplied by the two Iirms.
Which implies vertical (quality) diIIerence between the two products, But here we are concerned with only
horizontal product diIIerentiation .
The inverse demand Iunction oI goods and services oI variety 1 and 2 is given by:
2 1 1
dy y a x =
1 2 2
dy y a x =
The Iirm
s
linear cost Iunction is given as:.
( )
i i i i
wy wL y C = = ,where
i
L is the labour Iorce used by Iirm i . We assume that Iirm Iaces the constant
average and marginal wage cost w 0 Ior every unit oI output produced.
ProIit oI the Iirm i in every period can be written as :
( )
i i i j i i
wy y x y y = , .
Marginal proIits are obtained as Iollows:
w dy y a
y
=

2 1
1
1
2

(7)
475 Elsevier Publications, 2013
Bharti Kapoor

and Amanpreet Singh

w dy y a
y
=

1 2
2
2
2

(8)
Reaction Iunction oI 1
st
and 2
nd
Iirms are given below:
0
1
1
=

( )
2 1
2
1
dy w a y = (9)
0
2
2
=

( )
1 2
2
1
dy w a y = (10)
Hence the duopoly game with two players having heterogeneous expectations ,we take Iirst Iirm is bounded
rational and second Iirm is nave, producing diIIerentiated products is described by two-dimensional non-linear
map:
Using eq. (4),(7)&(10)
( )
( )

= = =
+ = =
+
+
t t t
t t t t t
dy w a y y y
dy y w a y y y y
F
, 1 , 2 1 , 2
'
2
, 2 , 1 , 1 , 1 1 , 1
'
1
2
1
2
:

(B)
5. Equilibrium Point and Local Stability
Now we will investigate the local stability and equilibrium oI duopoly game above discussed producing
homogeneous goods. First we Iind the Iixed points oI map (A),Which are explained below:
Take
1
'
1
s s = and
2
'
2
s s = in eq. (A),we get
( ) 0 2
2 2 1 2 1 1 1
= s a s a c a s (11)
( ) 0 2
1 2 2 2 2 1
= s a s a c a
(12)
( ) 0 2 . .
2 1 2
2
1 2 1 1 1 1
= s s a s a s c s a e i (13)
From eq. (12) we ge
2
1 2 2 1
2
2a
s a c a
s

= (14)
substitute this value in eq. (13),we get
( ) ( ) 0 2 4
2
1 2 1 2 1 1 1 1
2
1 2
= + s a s c a s c a s a
( ) 0 2 3
1 2 1 1 1
2
1 2
= + s c c s a s a
( ) ( ) 0 2 3
2 1 1 1 2 1
= + c c a s a s

2
2 1 1
1 1
3
2
, 0
a
c c a
s s
+
= =
From (14) we get
2
2 1 1
2
2 1
2
3
2
,
2 a
c c a
a
c a
s
+
=
So, we have two Iixed points


=
2
2 1
0
2
, 0
a
c a
F
and

+
=
2
2 1 1
2
2 1 1
*
3
2
,
3
2
a
c c a
a
c c a
F .
(15)
First Iixed point is called boundary equilibrium and have economic meaning when and second
equilibrium is called Nash equilibrium, and it has economic meaning when , (*)
476 Elsevier Publications, 2013
Equilibrium in non-linear differentiated duopoly

Jacobian matrix oI (A) is;
( )
( )

+
=
0
2
1
4 1
,
1 2 1 2 2 1 2 1
2 1
s a c s a s a a
s s J

The determinant is
2
1 2
s a
The matrix (A) Is called dissipative dynamical system when 2.
6. Local Stability of Boundary Equilibrium
At
0
F Jacobian matrix has the Iorm :
( )
( )

+ +
=
0
2
1
0 2
2
1
1 2 1
0
c c a
F J


This matrix has eigen values ( )
1 2 1 1
2
2
1 c c a + + =

, 0
2
=
As Irom (*),we get that 1.Then is unstable Iixed point. i.e. saddle point.
7. Local Stability of Nash- Equilibrium
At
*
F , jacobian matrix has the Iorm
( )


=
0
2
1
2 1
*
1 2
*
1 2
*
s a s a
F J

, ( )
*
2
*
1 *
, s s whereF =
The characteristic equation oI
( )
0
E J
is
( ) P Tr =
2
0 = + Det Where Tr is the trace and Det is
determinant oI the above Jacobian matrix, Tr
*
1 2
*
1 2
2
1
2 1 s a Det and s a =
Now this characteristic equation is quadratic in .
Its discriminant is
( ) Det Tr 4
2
( )
*
1 2
2
*
1 2
2 2 1 s a s a + = ~ 0 . which means eigen values oI Nash equilibrium are real.
The local stability oI Nash equilibrium are given by Jury`s conditions which are
1. Det 1
2. 1 Tr Det ~ 0
3 .1 Tr Det ~ 0
The Iirst condition is
*
1 2
s a 2

*
1 2
2
s a
<
477 Elsevier Publications, 2013
Bharti Kapoor

and Amanpreet Singh

+
<
2
1 2 1
2
3
2
2
a
c c a
a

Irom eq. (15)


1 2 1
2
6
c c a +
< (16)
The second condition is 1- Tr Det
*
1 2
2
3
s a ~ 0 , so second condition is satisIied
Then the third condition becomes
*
1 2
2
5
2 s a ~ 0 .


2
5
2
*
1 2
s a 0

( )
2 1 1
2 5
12
c c a +
< using eq. no. (15), (17)
So, Irom eq. no. (16) and (17),we can say that Nash equilibrium is stable iI

( )
2 1 1
2 5
12
c c a +
.
And an increase oI , starting Irom a set oI parameters which ensures the local stability oI Nash Equilibrium
,can bring out the region oI stability oI Nash equilibrium point crossing the Ilip biIurcation surIace

( )
2 1 1
2 5
12
c c a +
8. Conclusion
The main result oI the present analysis is that an increase in product diIIerentiation may destabilize the unique
Cournot Nash equilibrium; despite the rise in proIits that an increase in the extent oI product diIIerentiation can
lead to, it may also cause undesirable and unpredictable Iluctuations, while also contributes to reduce the market
size. Moreover, Irom the mathematical point oI view it is shown that the loss oI the market equilibrium stability
may occur through a Ilip biIurcation and that a cascade oI Ilip biIurcations may lead to periodic cycles and
chaos.
References
|1|. Agiza H.N, A.S. Hegazi and A.A. Elsadany Complex dynamics and synchronization oI duopoly game with bounded
rationality Math. And Computer Simulation 58(2002): 133-146
|2|. Agiza, H.N., Elsadany, A.A.,. Chaotic dynamics in nonlinear duopoly game with heterogeneous players. Applied
Mathematics & Computation 149(2004), 843-860.
|3|. Cournot.A Researches into the principles oI the theory oI wealth Engl. trans., Chapter VII, Irwin Paper Back Classics in
Economics(1963).
|4|. Den-Haan W.J The importance oI the number oI diIIerent agents in a heterogeneous asset-pricing model Journal oI Economic
Dynamics and Control 25(2001): 721-746.
|5|. Dixit,A.K. A model oI duopoly suggestiong a theory oI entry barriers. Bell Journal oI Economics 10 (1979), 20-32
|6|. Leonard, D ., Nishimura, K. Nonlinear dynamics in the Cournot model without Iull
inIormation. Annals oI Operations research 89 (1999),165-173.
478 Elsevier Publications, 2013
Index

N
N-Duality implies P-Duality, 470471
Neighbour and pair ordering
distance to similarity, 469
similarity to distance, 470

S
Stochastic variants, 465

T
Tai map, 462465
Tree edit distance, 461
alignment-duality, 468469
order-equivalence, 467468
order-relating conjectures, 468
stochastic variants, 465
Tai map, 462465
Zhang and Shasha algorithm, 465466

Z
Zhang and Shasha algorithm, 465466