Dynamic Duopoly with Vertical Differentiation

Abstract

I analyse a differential game where firms, through capital accumulation over time, supply vertically differentiated goods. This proves that several results obtained by the static approach are not robust. I show that (i) the sustainability of the duopoly regime is conditional upon the level of firms’ RD (ii) there are quality ranges where the low quality firm invests more than the high quality firm; (ii) there are quality ranges where the low quality firm’s profits are larger than the high quality firm’s.