A characterisation of duopoly dynamics with frictions in production adjustments

This article revisits the classical work of Puu (1991) on duopoly dynamics by gathering two distinct aspects of the functioning of markets: production of goods requires time and is subject to some gestation lags, but trading takes place continuously. Dynamics are characterised by a two-dimensional system of delay differential equations. The main aim of this work is to show that regular and non-regular fluctuations may emerge endogenously because of the existence of heterogeneous interacting agents that choose production period by period in a myopic way. Chaotic dynamics in the discrete-time model of Puu (1991) appear to be close enough to the origin of axes. In contrast, in our continuous-time version of the model with discrete delays, the dynamic system is more suitable of generating complex dynamics far enough from the origin when marginal costs vary. This is because of the role played by time delays and inertia. From a mathematical point of view, we show the existence of Hopf bifurcations and detect how time delays and inertia affect the stability of the system by using the recent techniques of stability crossing curves introduced by Gu et al. (2005) and generalized by Lin and Wang (2012). The article also provides some findings about global bifurcations and chaotic dynamics by combining analytical studies and simulation exercises.