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International Handbook on Industrial Policy

Edited by Patrizio Bianchi and Sandrine Labory

This timely and much-needed Handbook reconsiders an old topic from a fresh perspective, raising a number of new, interesting and worthwhile issues in the wake of ten years of globalization. This comprehensive analysis illustrates that old-style industrial policies whereby the government directly intervened in markets, and was often the producer itself, are no longer relevant. Structural changes occurring in economies – summarized in the term ‘globalization’ – are triggering the definition and implementation of new industrial policies. The contributors, leading experts in their field, unite to evaluate this shift of over a decade ago.
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Chapter 21: Differential Game-Theoretical Analysis and Industrial Policy

Roberto Cellini and Luca Lambertini


21 Differential game-theoretical analysis and industrial policy Roberto Cellini and Luca Lambertini 1 Introduction Even if industrial organization (IO) generally deals with dynamic issues, the most widely used theoretical models are in fact static. This holds for the vast majority of the existing models involving strategic interdependence among agents, and taking a game-theoretical approach. At most, they are multi-stage games, in which the dynamics is implicitly summarized by the backward induction process, or they are repeated static games (as is the case for the various folk theorems employed to investigate collusive behaviour or entry deterrence). A proper dynamic approach in presence of strategic interdependence among firms requires the adoption of differential game theory tools. Differential games are a special class of dynamic games: specifically, they are games in which a set of state variables is introduced, to describe the state of a dynamic system at any particular instant, and its evolution over continuous time.1 In the previous chapter of this Handbook, Lambertini has discussed why differential games have received relatively scant attention from economics and specifically from IO so far. In this chapter we show that, once a proper differential game approach is taken, relevant results may drastically change as compared to the results deriving from a static game approach. More specifically, we focus on a few particular issues, and discuss how a proper dynamic approach affects the resulting industrial policy prescriptions. We focus on five specific problems: (i) the...

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