Competition in a duopoly with sticky price and advertising

This paper develops a differential duopolistic game where price is sticky a nd firms can invest in market-enlarging promotional activities which have a public good nature. One finding indicates that advertising, and not output as in Fershtman and Kamien (Econometrica 55 (1987) 1151-1164) is responsib le for the higher stationary price found in the open loop equilibrium relat ive to the linear feedback one. That is, free-riding is more intense when f irms play linear Markov feedback strategies. However, the collusive outcome can be approximated, and opportunism eliminated, if firms can engage in pr eplay negotiations where they select a nonlinear Markov perfect strategy fo r output and advertising. Achieving the collusive outcome requires las in t he Folk Theorem for infinitely repeated games) the discount rate to be suff iciently small. (C) 2000 Elsevier Science B.V. All rights reserved.