Dynamic Games and Oligopoly Models of Technological Innovation

Since innovation is clearly a dynamic phenomenon, the process of technological innovation should be analysed by making use of a dynamic approach. In this paper we present two different models of innovation in the framework of an oligopolistic market and show that differential (or difference) games can provide an appropriate analytical tool to analyse this kind of problems. In this context it is possible to introduce state variables representing the technological knowledge accumulated by the firms over time and to link the innovation process to those variables. Equilibria in Markov strategies are computed by using a modified policy iteration algorithm.