Evolutionarily Stable Quality and Price in Oligopoly : A Comparison with Nash

The article proposes an evolutionary game theoretical analysis of quality and price competition in oligopoly. Using the notion of a finite population evolutionarily stable strategy (FPESS) defined by Schaffer (1989), the relative payoff maximizing behavior is compared with the absolute payoff maximizing behavior. In the literature of IO on quality competition, two different assumptions are made about the nature of cost function. First, firms produce quality mostly with fixed costs and second, quality is produced by variable costs. Therefore, in the context of a symmetric oligopoly game where each firm has two dimensional strategy set of price and quality, the present paper attempts to answer a question regarding the equivalence of FPESS and Nash equilibrium. In conclusion, whether firms produce quality with fixed costs or variable costs, our results show that Nash equilibrium, FPESS and competitive equilibrium are distinct. Moreover, this paper provide a generalization of evolutionary game setup of Tanaka (2000) where we obtain not the same equilibrium price comparison between Nash and FPESS from the one that attained in Tanaka (2000, proposition 2)