Dynamic Firm Conduct and Market Power in the Personal Computer Processor Market

In this paper I study the extent of competition in the computer CPU market with a dynamic duopoly model. Dynamics in the game come from learning-by-doing in the production process, where future production costs are reduced with current cumulative production. A behavioral parameter that nests three market structures -social welfare maximization, Nash behavior and joint profit maximization- is incorporated in the firm's optimization problem. This allows the identification of the objective function of the firms that is consistent with a Markov Perfect Equilibrium of the game. Results suggest that firm's behavior is close to a Markov Nash perfect equilibrium but slightly more competitive. A static model of firm behavior that does not consider dynamic incentives overestimate the extent of competition in the market.