Non-linear dynamics and duopolistic competition: A R&D model and simulation

In recent years, a number of studies have considered the application of chaos theory to economics; the primary focus, however, has been the implications for stock prices, the foreign exchange market, and the macroeconomy. This paper describes a non-linear model of duopolistic competition, which focuses on a firm's expenditure and the resulting quality or technological endowment of its product. Results from computer iteration of the model are presented which indicate that chaotic outcomes are possible for a range of competing managerial policies; the associated unpredictability is due solely to the dynamics of the interaction. The study also provides the results of some initial work on how management adaptation may act to forestall chaotic outcomes.