Journal of Business Research 51 (2001) 179 ± 191

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

model and simulation
Simon Whitbya,1, David Parkerb,*, Andrew Tobiasa,1
a
School of Manufacturing and Mechanical Engineering, University of Birmingham, Birmingham, B15 2TT, UK
b
Aston Business School, Aston University, Birmingham, B4 7ET, UK
Received 1 December 1998; accepted 1 December 1998

Abstract

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. D 2000 Elsevier Science Inc. All rights reserved.

Keywords: Economics; Competition; R&D; Non-linear dynamics; Chaos

1. Introduction interaction. The study also provides some initial results on

In recent years, a number of studies have suggested that
non-linear dynamics offers a useful approach to economic
modeling (e.g. Baumol and Benhabib, 1989; Day, 1987;
Kelsey, 1988; Parker and Stacey, 1995; Radzicki, 1990 and
the papers in Anderson et al., 1988). The approach
requires a form of systems thinking which recognizes that
systems evolve and adapt, persistently existing far from
equilibrium. In particular, in a number of cases, systems of
simple non-linear modeling equations have been shown to
be capable of erratic and random-like behavior, which is in
fact deterministic; such behavior is described as determi-
nistic chaos.
This article provides a non-linear model linking R&D
spending and product quality in a duopolistic industry.
Results from a computer iteration of the models are pre-
sented. These indicate that chaotic outcomes are possible for
a range of competing managerial policies with the associated
unpredictability being solely due to the dynamics of the
* Corresponding author. Tel.: +44-121-359-3611; fax: +44-121-333-
3474.
E-mail address: d.parker1@aston.ac.uk (D. Parker).
1
Tel.: +44-121-414-4263; fax: +44-121-414-7484.
work into how management adaptation may act to forestall
chaotic outcomes. The article has relevance to anyone
researching or managing in the field of R&D and innovation.
The results demonstrate that, based on some simple beha-
vioral rules, quite complex chaotic outcomes are possible.
They also show that, with an awareness of the possible
outcomes from certain adaptive adjustments, management
actions can prevent or remove chaotic outcomes. In particu-
lar, collaboration between the duopolists may dampen erratic
fluctuations and actually be welfare-enhancing in economic
terms. The paper begins with a summary of previous related
research into non-linear models and microeconomics.
2. Microeconomics and chaos
2.1. Chaotic systems
Chaos theory concerns systems where the relationships
between variables are such that unpredictable but determi-
nistic outcomes can result. Evolving chaotically, system
variables are oscillatory with upper and lower bounds, the
fluctuations being erratic to the extent that standard statis-
tical tests cannot distinguish them from purely random data.
The behavior, however, is deterministic and not a result of

0148-2963/01/$ ± see front matter D 2000 Elsevier Science Inc. All rights reserved.
PII: S 0 1 4 8 - 2 9 6 3 ( 9 9 ) 0 0 0 5 0 - 8
180 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
outside (exogenous) factors. It is solely due to the mathe-
matics of the relationship between variables endogenous to
the system. In addition, such systems can have periods of
regular behavior, such as equilibrium and periodicity, that
arise abruptly and disappear just as suddenly.
The state of an evolving system can be represented by a
number of time-dependent variables; the minimum number
of variables (n) needed to characterize a system is called its
dimension. As a system evolves, its state can be considered
to exist in a space of dimension n called phase space, the
components of which correspond to the system's n state
variables. A geometric space with axes given by the phase
space components (i.e. the system variables) provides a
setting for the graphic illustration of a system's evolution. In
particular, for a dissipative system (i.e. one possessing a
mechanism to dissipate perturbations from steady motion), a
steady-state behavior can take place in phase space on an
attractor. Crutchfield et al. (1986) define a system's attractors
as geometric forms that characterize the system's long-term
behavior in phase space. Chaotic evolutions of dissipative
systems in phase space occur on strange attractors, which are
complicated shapes of fractal structure, first observed by
Lorenz (1963). Many studies of non-linear dissipative dyna-
mical systems use strange attractors to characterize chaos.
In order to predict future states of a time-dependent
system, a set of modeling equations can be developed. Such
a set of equations is called a dynamical system, which may
evolve continuously or discretely over time depending on
the real system modeled. A continuously evolving dynami-
cal system is called a flow, while the discrete case is called a
mapping. Flows are represented by differential equations,
while difference equations describe the discrete case. The
dependencies governing the evolution over time, t, of a
deterministic flow can be expressed as a set of first-order
differential equations giving the rates of change of the n
system variables, xi, in terms of the same variables, i.e.:
d x1
ˆ f1 …x1 ; x2 ; . . . ; xn ; t†
dt
d x2
ˆ f2 …x1 ; x2 ; . . . ; xn ; t†
dt …
# changing (usually increasing) one or more ``control'' para-
d xn
ˆ fn …x1 ; x2 ; . . . ; xn ; t†
dt
For a discrete-time-mapping, the evolutionary laws can be
similarly expressed, but as difference equations giving the
values of the system variables in period t + 1(xi,t + 1) in
terms of their values in the previous period, t(xi,t), i.e.:
x1;t‡1 ˆ g1 …x1;t ; x2;t ; . . . ; xn;t ; t†
x2;t‡1 ˆ g2 …x1;t ; x2;t ; . . . ; xn;t ; t†
…
# below a critical value. The bursts are usually seen to become
xn;t‡1 ˆ gn …x1;t ; x2;t ; . . . ; xn;t ; t†
The most fundamental requirement for chaos is non-
linearity. In the context of Eqs. (1) and (2), this essentially
means that at least one state variable will appear in the
functions fi or gi (where i denotes the index of a general
variable) with a non-linear relationship to the rate or the
next period value, respectively. Over and above this, precise
specification of the prerequisites for chaos of a general
system is difficult; there are presently no general criteria to
establish the necessary and sufficient conditions for a
system of differential or difference equations to be chaotic.
Requirements have been established, however, regarding
the minimum dimensionality of the system. Different con-
ditions exist for flows and maps (Ott, 1993). For the case of
first-order, autonomous ordinary differential equations, i.e.
of the form of Eq. (1), the lowest dimension for which
chaos is possible (nmin) is 3. For a mapping, the minimum
required dimensionality differs depending on whether or not
the mapping is invertible. Using notation as in Eq. (2), an
invertible map is one whose equations, as well as giving a
unique value for each xi,t + 1 from the set of xi,t can also be
solved to give a unique value for each xi,t from the xi,t + 1.
For an invertible map, there cannot be chaos unless nmin 
2. For a non-invertible map, chaos is possible even for a
dimensionality of one. The logistic equation introduced by
May (1976) in a study of population, is a one-dimensional
map often used to illustrate chaotic behavior. It is a finite
difference equation with a quadratic non-linearity or hump
and takes the general form xt + 1 = l x t (1ÿxt). In population
studies, xt + 1 represents the population level and depends
on its immediate predecessor, xt. The parameter l is the
growth rate from one cycle to another and x is constrained
by a resource constraint modeled as 1ÿxt. Through feed-
back leading to period doubling (see later), the system's
evolution can become chaotic as the parameter value, l, is
increased, with chaos occurring when l is between around
3.6 and 4.
Whereas little can be said, a priori, concerning a system's
capability of producing chaos, for systems shown to be
chaotic some typical ``routes'' or ``scenarios'' have been
identified by which the onset of chaos may be approached.
1† In each case, the transition is effected by continually
meters, such as l in the logistics equation above. Normally,
only one parameter is varied, in which case the scenario is
known as a codimension Ð one route to chaos. Generally, at
distinct values of the changing parameter (l) bifurcations
occur. Bifurcations involve qualitative changes in the beha-
vior of the system, for example, from equilibrium to
periodic or from periodic to chaotic (for a fuller explanation
see, e.g. Berge et al. 1984; Eckmann, 1981; Medio, 1992;
Ott, 1993). One scenario, known as intermittency, involves
interruption of otherwise regular periodic evolution with
2† bursts of irregular, chaos-like behavior as l is varied above/
more frequent as l is increased/decreased until the original,
regular behavior is lost and becomes chaotic.
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Another route to chaos for an initial period system, is
period doubling. As l is increased, bifurcations occur at
particular values as additional periodicities complicate the
system's cycle. The frequency of bifurcation increases as l
is progressively increased until at a finite value of l the
number accumulates to infinity; increasing l beyond this
point results in the evolution becoming chaotic. Period
doubling will be described in further detail later, when
considering the results of our model.
In the light of what has been described above, we can
say that any possible candidate to represent a chaotic
system must satisfy the non-linearity and minimum dimen-
sionality requirements. In addition, the model must be
oscillatory, or at least have the potential to be so, in order
not to preclude the possibility of its developing from
periodic to chaotic evolution.
2.2. Chaos and the firm; inventory control
If microeconomic institutions such as firms and markets
are governed by linear, or simple non-linear relationships, it
is possible to study them separately (adopt a reductionist
methodology) without losing crucial characteristics of their
behavior. Interactions with other firms or markets can be
relatively easily assimilated into the models as generally
well-behaved positive and negative feedback effects. Equi-
librium outcomes result and uncertainty as to the model's
outcome is minimized. If economic systems are significantly
non-linear, however, then their behavior may be highly
unpredictable, and this limits the application of both tradi-
tional neoclassical market models and more recent games
theoretic modeling involving Bayesian techniques.
Many of the non-linear models, which have identified the
potential for chaos in microeconomics, involve discrete-time
queuing or consideration of inventory. A typical example is
the beer distribution model, an exercise in beer-stock
management involving non-linearity and feedback (Mose-
kilde and Larsen, 1988; Sterman, 1988; Van Ackere et al.,
1993). Mosekilde and Larsen presented an overview of this
model's behavior, producing a time series through iterations
of the model and identifying chaos for certain parameter
values. Sterman's approach was notably different in his use
of the model to provide a simulated environment in which
subjects could take part in a beer distribution game. To
describe the subjects' behaviors, a general heuristic was
constructed, which, on further iteration, suggested chaos for
a significant minority of values.
The common feature in these inventory control models
is a delay between the ordering of new stock and its
delivery. Furthermore, disruption in one part of the supply
chain leads to a sequence of changes in other parts;
expansion of output, for example, leads to excess capacity
developing when orders fall. Overall, this suggests a
tendency for oscillation in supply behavior, which, for
certain conditions, can become chaotic (Erramilli and
Forys, 1991; Levy, 1994).
181
The interplay between two departments functioning se-
parately and in parallel, as opposed to in sequence as in the
stock management problem, was considered in a study by
Rasmussen and Mosekilde (1988). This study proposed a
model of a production company where resources are shared
between production and marketing in accordance with a
decision rule reflecting variations in inventory or the back-
log of customer orders.
Other studies have suggested that the incidence of chaos
in business may be much wider. For example, it has been
suggested that there may be a tendency towards strongly
non-linear local interactions where there are nonconvexities
in production technology, due to technological indivisibil-
ities for instance (Gordon, 1992). Gordon also used a
variation of the logistic equation to produce a plausible
model of the relationship between a company's advertising
budget and its resulting sales. Further economic relation-
ships subject to feedbacks and timing, which have been
investigated for chaotic outcomes, are investment behavior
(Mosekilde et al., 1992), the planning of teacher ±student
ratios in education (Feichtinger and Novak, 1992), and
advertising outlays (Baumol and Benhabib, 1989).
The effect of research and development (R&D) activity
on a firm's time path has been modeled by Baumol and
Wolff (1983), Feichtinger and Kopel (1993), and Kopel
(1996). Baumol and Wolff focused on the relationship
between R&D and productivity growth, showing chaos to
be possible for certain conditions. The Feichtinger and
Kopel and Kopel models, on the other hand, described a
non-linear increase of sales for higher R&D allocations,
employing a treatment closer to that presented here. Nota-
bly, Feichtinger and Kopel placed particular emphasis on the
influence of the decision-maker (i.e. the manager) whose
input amounted to periodic adjustments to R&D funding in
the light of current sales. This was represented by a non-
linear decision rule that is well-founded in behavioral
decision theory, and which also features in the model used
in this study, namely the anchoring and adjustment heur-
istic, described in Tversky and Kahneman (1974). A variety
of temporal behavior was observed, including chaos.
In the above studies, the model parameters representing
human behavior were kept at a constant value throughout a
given evolution. This failure to allow parameter variability
within evolutions effectively ignores the fact that decision-
makers may adjust their responses over time; their actions
may evolve through some form of iterative process, for
example. There is a comment on this point in Sterman
(1988, p. 174).
2.3. Chaos and oligopoly
Oligopolistic industries demonstrate phases of co-opera-
tive behavior and phases of intense price and non-price
competition. Such phases result from oligopolists taking
into consideration the reactions of their competitors, as well
as consumers. Competitors may retaliate to price cuts, for
182 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
example, by also cutting prices so as not to lose market
share. Developments in oligopoly theory have shown that
various other outcomes are possible depending, for exam-
ple, upon the financial strength and production conditions
for each of the firms. In recent years, it has been recognized
that competition among a few firms can be usefully modeled
in a game theoretic framework that contains feedback, time,
and uncertainty. In game theoretic models of oligopoly,
rivalry is studied from an equilibrium (usually a Nash
equilibrium) perspective and uncertainty is dealt with by
an expected profit or payoff maximization. The outcome
then depends upon the assumptions made about actions and
reactions at the various stages of the game (e.g. see
Hargreaves Heap and Varoufakis, 1995; Phlips, 1995).
Game theory has introduced dynamism into the study of
the competitive process, opening up the possibility of
sufficiently non-linear reaction functions to give chaotic
outcomes. Rand (1978) considered the possible conditions
in which chaotic behavior might result, and more recently,
Byers and Peel (1994) flagged the possible contribution the
analysis of dynamic non-linear behavior might make to the
study of industrial economics. To date, however, there has
been limited analysis of the potential for chaos in oligopo-
listic markets. Noteworthy studies include that by Dana and
Montrucchio (1986), which showed how chaotic dynamical
paths might arise in duopoly where there are small rates of
discount, and that by Puu (1994), who considered an
adjustment process for a pair of Cournot duopolists. Puu
demonstrated mathematically that with an iso-elastic de-
mand function and constant marginal costs, the duopoly
system could exhibit periodic, and even chaotic behavior.
In Section 3, a new, non-linear model of duopolistic
interaction is described in which the effect of managerial
policy plays a central role. The formulation is based on the
relationships specified in the R&D model of Feichtinger and
Kopel (1993). However, while their study included manage-
rial judgements relative to an internally determined target
performance, the following extends the analysis by applying
the relationships to the interaction between two separate,
competing companies, the policy judgements of each being
made in light of its own performance relative to the other. In
addition, while Feichtinger and Kopel's treatment, along
with the vast majority of model simulation studies, makes
no allowance for policy adjustment over time, this study
makes some attempt to include the management's capacity
to adapt its strategy.
3. A basic model of duopolistic competition with
non-linear dynamic interactions
The proposed model describes two manufacturers pro-
ducing a similar technological product and competing
through product innovation. In both cases, managerial
decisions regarding the extent of an input or resource
allocation are made in the light of the organization's recent
standard of achievement in terms of the resulting product,
relative to that of the competition. In addition, this stan-
dard is, for both firms, a direct result of the level of inputs,
i.e. resources applied. In constructing the model, particular
emphasis was placed on the resources that each allocates
to R&D, and the resultant (measurable or subjective)
product standard/quality, such as the number of features
or durability. The latter are means by which discerning
consumers may differentiate in a market where product
standard is an important order winning criterion. Expendi-
ture on R&D could also result in a change in the process
of production rather than a change in the product, having
implications for costs of supply; this impact on process is
not modeled here. In the model, an increase in a compa-
ny's resource allocation to R&D is considered to lead to an
improved product standard (quality or technological en-
dowment of the product), while having a product standard
superior to that of the competition is deemed to constitute
a competitive advantage leading ultimately to greater sales
and profits. Current sales, therefore, are considered to be a
direct result of the current, relative product standards of the
competitors and so do not need to feature explicitly in the
model. Each firm is assumed to be able to monitor readily
the product standard of its competitor.
The model is structured to represent two companies, A
and B, for which the resource allocations to R&D for period
t are denoted by RAt and RBt, resulting in product quality
standards denoted for A and B during period t by SAt and
SBt, respectively. Modeling R&D to impact on the product
standard in the same time period is admittedly a simplifica-
tion Ð R&D might be expected to affect product standard in
t + n where n varies depending on the product and industry;
the simplification is introduced for ease of modeling. A
notable consequence of the simplification is that for condi-
tions under which the system oscillates over time, the
fluctuations of the separate companies will be either in
phase (peaks coincide) or in anti-phase (one's peaks coin-
cide with the other's troughs).
To facilitate description, X, RXt and SXt are used to
represent either company and its associated system vari-
ables for period t, in the general case. Arising from
managerial decisions made at the end of each time period,
changes to R&D allocation are modeled as dependent on
the current relative quality or technological standing of the
firm's products.
The interactions within the system are shown in Fig. 1,
where the arrows between variables represent deterministic
cause and effect Ð the ``tail'' variables affecting the ``heads,''
e.g. RAt affects SAt. The dotted arrows describe similar
effects but between tail variables and the head variables of
the following period, e.g. SAtÿSBt affects RAt + 1.
For both companies, the demand for the output in the
market is assumed to be a function of the product standard.
Other variables that may impact on demand, such as price,
are assumed to be unimportant or constants. While it is
recognized that the amount of resources dedicated to R&D
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Fig. 1. Model of duopoly comprising two similar manufacturers (A and B)
of technological products.
may have implications for costs and consequently affect
prices and demand, the introduction of this feedback would
complicate the analysis and is not, in any case, the relation-
ship which we wished to study. Hence, in the analysis:
QAt =Yt ˆ f …SAt ÿ SBt † …3†
QBt =Yt ˆ f …SBt ÿ SAt † …4†
where Yt is the total market volume for period t and QAt and
QBt are sales of A and B, respectively for that period,
making QA/Y and QB/Y the respective market shares. As the
market is a duopoly,
QAt =Yt ‡ QBt =Yt ˆ 1 …5†
For both companies, the R&D expenditures, RAt+1 and
RBt+1, for a given period, t + 1, are assumed to arise from
management decisions at the end of the previous period, t,
(Eqs. (6) and (7)). The expenditure for a period t is
considered to determine directly the quality standard
achieved in production (SAt and SBt) during the same
period, t, (Eq. (8)).
RAt‡1 ˆ max‰0; RAt ‡ c…SAt ÿ SBt †Š …6†
RBt‡1 ˆ max‰0; RBt ‡ d…SBt ÿ SAt †Š …7†
m 
x
SXt ˆ 2 arctan…RXt † ÿ nx …8†
p
The parameters mx and nx in Eq. (8), can be used to tune the
curvature of the function for company X.
If the SXt in Eqs. (6) and (7) are substituted by SXt =
f (RXt), from Eq. (8), then the decision rules take the form
R X t +1 = g(RXt); expressed in this way the representation of
the decision process is seen to be non-linear. Expressions (6)
and (7) are similar in form to that used by Feichtinger and
Kopel (1993), and are based on the anchoring and adjust-
ment heuristic described in Tversky and Kahneman (1974).
The estimation of an unknown quantity by anchoring and
adjustment involves a preliminary estimate given by a
known reference point (the anchor) which is then adjusted
for the effects of other factors. Sterman (1989, p. 324)
reports that ``anchoring and adjustment has been shown to
apply to a wide variety of decision-making tasks'', and gives
appropriate references.
183
For the managerial decisions in this model, the alloca-
tion of the previous period, e.g. RAt for company A, is
identified as the anchor, while an adjustment is considered
to depend on the relative product standards of the two
companies. Eq. (6) for A, for example, shows RAt acting
as the anchor with an adjustment based on the advantage A
has over B in current product standard, i.e. SAtÿSBt. The
parameters c and d are used to define the two management
policies for allocation adjustment. For instance, again
considering A, a positive value of c is used to represent
a reinforcing policy of further increasing a company's
research funding when performance is good, i.e. SAt >
SBt, and reducing funds when performance is poor (SAt <
SBt). Conversely, a negative adjustment parameter reflects
a counteracting policy of reducing funds when perfor-
mance is good, a poor performance resulting in their
increase. The two policies are summarized for company
A in Table 1. The modulus of the parameter is used to
model the extent to which the management alters funding
in light of the company performance, i.e. the sensitivity of
the decision-maker to performance outcomes. As the deci-
sion rules stand, only the two policies are possible; the
specification of a company's action when in a position of
advantage necessarily implies its action when disadvan-
taged and vice-versa. The formulation could be extended,
however, to allow a greater range of procedures where, for
example, a company could adopt a policy of reinforcement
when at an advantage but take counteracting action when at
a disadvantage.
For each company, the function describing the effect of
various R&D fundings on product standard should show a
general increase of the latter with the former, the relation-
ship becoming markedly non-linear for higher R&D ex-
penditures as diminishing returns set in. Furthermore, in
order to investigate the possibility of complicated behavior,
it is important to consider a description of SXt = f (RXt) for
which non-linearity is apparent over the range of values of
RXt displayed by the model in practice. A function is
required, therefore, whose position and extent of curvature
can be adjusted easily in the light of the range of variation
Table 1
Reinforcing and counteracting policies for company A
Corres-
ponding Action taken Action taken
Allocation range of if in a position if in a position
adjustment adjustment of advantage of disadvantage
policy parameter c (SAt > SBt) (SAt < SBt)
Reinforcing c>0 Attempt to reinforce Retreat, i.e. decrease
advantage, i.e. research allocation
increase in allocation
to research
Counteracting c < 0 Relax because of Attempt to improve
advantage, i.e. position, i.e. increase
decrease allocation research allocation
to research
184 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Fig. 2. The relationship between R&D expenditure (RXt) and product
standard (SXt). Graph origin at (0,0).
observed on initial iterations of the model. Suitable control
is obtained with the arctan form in Eq. (8) above, the shape
of which can be tuned by changing mx and nx. Together,
these parameters determine the upper and lower bound of
SXt in the model. In particular, varying nx changes that
value of product standard (SXt) corresponding to a research
allocation (RXt) of zero; SXt = 0 and RXt = 0 only coincide
for the parameter value nx = 0. It is reasonable to expect SXt
= 0 to correspond to some positive value of RXt, reflecting
some element of fixed costs that do not impact on product
standard, and this is represented in Eq. (8) by a positive
value of nx. The general shape of Eq. (8) is shown in Fig. 2
for which the origin is (0,0) and the negative intercept on the
SXt axis is equal to the value of nx used.
4. Experimentation and results
In general, non-linear dynamical systems, such as the
model presented here, describe temporal evolution with
equations for which there is no simple solution. In such
cases, investigation takes the form of computer iteration, i.e.
computer simulation, which, rather than attempting to solve
the equations, repeatedly implements the model and so
produces actual temporal behavior for analysis. Accord-
ingly, computer simulation was used to investigate the
evolution of our model. Along with quantification of para-
meters for Eqs. (6) ± (8), each simulation of a given system
arrangement required specification of initial R&D alloca-
tions for A and B, i.e. RA0 and RB0. To facilitate the study,
it was assumed that the relationship between funding for
R&D and product standard, Eq. (8), was identical for the
two companies. As a consequence, if one firm spends more
than the other on R&D, this will imply an advantage in
product standard for the same company for that period, e.g.
RAt > RBt () SAt > SBt.
Often, the time paths of an evolving system are consid-
ered in phase space, a mathematical space whose n coordi-
nates correspond to the system's n state variables (n being
the minimum number of variables needed to characterize the
system, i.e. its dimension). If n  3, or a subset of phase
space with less than three components is considered, then
this space provides a setting for the graphic illustration of a
system's evolution (see Crutchfield et al., 1986 for an
introduction to phase space, attractors, and the chaotic
strange attractors). However, as will be seen, for the
interesting oscillatory behavior of this system, the two
companies evolve either in phase or in anti-phase (i.e. with
a phase difference of p). It follows that if an appropriate
two-dimensional phase space ((RAt, RBt) or (SAt, SBt)) is
used to analyze system behavior, any oscillatory motion
(including chaos) will produce an unilluminating, straight-
line phase trajectory. For this model, therefore, phase space
offers a less effective illustration of system behavior than
that given by time series, and accordingly, the latter are used
here to present the results.
The evolutionary properties of the system were found to
depend on the coupling of company strategies. Particular
couplings were specified by the parameter pairings (c,d),
referred to here as the system arrangement. Arrangements
were then classified into four groups, each comprising a
different permutation of the paired signs of c and d, i.e.
(+,+), (+,ÿ), (ÿ,+), and (ÿ,ÿ), and each group containing a
continuous range of system arrangements corresponding to
different moduli of c and d.
4.1. Arrangement group (+,+)
For this class of arrangement, both companies implement
reinforcing policies and incorporate a positive feedback
loop, i.e. RAt!RAt + 1 and RBt!RBt + 1, the two inter-
acting through the comparison of SAt and SBt (see Fig. 1).
When a firm is ahead in product standard, it invests more in
the next period to maintain or increase its competitive
advantage; when it is behind, it retreats and invests less,
perhaps with a view to eventual withdrawal from the
market. It was found that for this group of policy arrange-
ments, the system was not prone to oscillation, but instead,
RAt and RBt repeatedly diverged, one to zero, the other
continuously increasing. As would be expected, SAt and SBt
also diverged, approaching the upper and lower limits
bound by the function (8). The company gaining the
advantage, therefore, spends an increasing amount on de-
velopment for marginal increases in product quality/sales.
The tendency for divergence rather than oscillation can
be understood in terms of the feedback structure of the
system for these arrangements. Here, positive feedback in a
company reflects the fact that the policy of its management
will tend to reinforce any initial difference between SAt and
SBt. It follows that for (+,+) arrangements, any initial
difference in product standard of A and B will be amplified
by managerial actions in both cases and so oscillation will
not occur. Rather, SAt and SBt will repeatedly diverge to the
upper and lower bounds of the model, as observed.
Coupled with non-linearity, system oscillation is an
essential condition for the onset of chaotic behavior, and
the lack of oscillation for (+,+) system arrangements implies
an inability to produce chaotic behavior.
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191 185

4.2. Arrangement group (+,ÿ)/(ÿ,+) the smaller allocation (RA0 > RB0). The system again
showed monotonic behavior rather than oscillation or chaos.
The groups of opposing managerial policies (+,ÿ) and This behavior can be explained by the fact that here, B, with
(ÿ,+) are identical due to the structural symmetry of the its sensitive reinforcing policy, increases its initial disad-
model and while the following refers to (+,ÿ), it applies vantage and so directs SBt towards zero. Meanwhile, the
equally to (ÿ,+). For these arrangements, on occasions smaller counteracting policy of A means this company acts
when the firm with the reinforcing policy is ahead in terms so as to relax on its advantage. The overall result of these
of product standard, this firm invests more in R&D. In tendencies is that both SBt and SAt fall to zero, with the
such cases, the trailing competitor (with a counteracting former having the more sensitive policy, thus reducing the
policy) does the same in the hope of making good its more rapidly.
present loss of competitive advantage. Equally for this
arrangement group, circumstances occur for which the 4.2.3. Scenario 3
counteracting firm has the advantage and, true to its policy, Investigations were also carried out on a third type of
relaxes and invests less in R&D, perhaps expecting to (+,ÿ) arrangement, somewhat different from the two
maintain its competitive advantage without additional R&D considered above. In this case, the one company (B) had
effort. In this case, the trailing, reinforcing competitor also a sensitive counteracting policy (d = a large negative
invests less, representing a firm which, when trailing, sees number), while the other (A) had a less sensitive reinfor-
no point in trying to compete through R&D to improve its cing policy. Further, the initial conditions were such that
market share. the counteracting company started with a greater allocation
Investigation of the model showed the potential for (RB0 > RA0), which translated to SB0 > SA0. For these
oscillation to depend not only on the modulus and sign conditions, for certain parameter values, oscillatory beha-
of the parameters, but also on the initial relative standing vior was observed, shown for variables RAt and RBt in
of the two companies. This led to the consideration of four Fig. 3(a) and (b), respectively. It is notable that while the
general scenarios. two variables took values over different ranges, their
oscillations were in phase.
4.2.1. Scenario 1 The potential for chaos in non-linear systems is often
Arrangements were investigated for which one company investigated by varying one system parameter while the
(say B) had a sensitive reinforcing policy (d = a large others are kept constant. The occurrence of increasingly
positive number), while the other (A) had a less sensitive complicated periodic behavior leading to chaos as a para-
counteracting policy (c = a smaller negative number), with meter is varied and is well-recognized in chaotic systems.
initial conditions such that the reinforcing company started Where one parameter is varied, the scenario is known as a
with the greater allocation (RB0 > RA0). For these condi-
tions, as for (+,+) arrangements, the model showed no
potential for oscillation or chaos. In this case, the RAt and
RBt (and so SAt and SBt) variables both increased repeat-
edly over time. As before, this tendency for monotonic
variation rather than oscillation can be understood from the
system's feedback structure, as determined by the policies.
For these arrangements and initial conditions, the larger
initial funding of B translates to a larger initial product
standard SB0. As the model is iterated and the system
evolves, B, with its sensitive reinforcing policy, will
further increase funding and so amplify its advantage. At
the same time, A, with its counteracting policy, attempts to
remedy its disadvantageous initial position by increasing
its funding. Due to the lower sensitivity of its policy,
however, A repeatedly redresses B's advantage less than
the extent to which B further increases it. Overall, there-
fore, SBt and SAt will diverge to the upper bound of the
model, but with SBt > SAt at all times before the upper
bound is reached.

4.2.2. Scenario 2
Further (+,ÿ) arrangements were investigated for poli- Fig. 3. (a) Period 1 oscillations of RAt for system arrangement (c, d) =
cies with relative sensitivities as above, but with initial (+0.1, ÿ3.8), initial conditions (RA0, RB0) = (10.0, 15.0). (b) Period 1
conditions such that the reinforcing company started with oscillations of RBt, with system arrangement and initial conditions as in (a).
186 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191

codimension-one route to chaos. Generally, at distinct
values of the changing parameter, bifurcations occur. Bifur-
cations involve qualitative changes in the behavior of the
system, for example, from equilibrium to periodic (for a
fuller explanation see e.g. Berge et al., 1984; Eckmann,
1981; Medio, 1992; Ott, 1993). Such a process was ob-
served for these system conditions, as shown in Fig. 4(a),
(b), and (c) for which the system's behavior was studied for
increasingly negative settings of d. These changes corre-
spond to a company (B in this case) becoming increasingly
sensitive in its counteracting policy, while sensitivity at the
reinforcing competitor remains unchanged.
The plots in Fig. 4 indicate classic period doubling. In
Fig. 4(a), for which policy parameter d = ÿ4, the evolution
of RBt was found to undergo two oscillations, with two
different maxima and minima, before a full cycle back to the
initial value was completed. Behavior of this type is known
as a period 2 evolution, while the most basic oscillations of
Fig. 3 are termed period 1, the system bifurcating from the
latter to the former as the control parameter (d) is varied. In
Fig. 4(b), d has become more negative, d = ÿ4.18, and
another bifurcation has occurred so that the periodic beha-
vior has become even more complicated; each complete
period now comprises four sub-oscillations: a period 4
evolution. In theory, this period doubling as a system
parameter is increased/decreased will continue for even
higher periods. For increasingly higher period numbers,
however, the bifurcations occur for progressively smaller
changes in the increasing/decreasing parameter, and there-
fore, become progressively more difficult to observe.
For some non-linear systems, if the control parameter is
progressed past a critical value, the motion becomes aper-
iodic, producing the phenomenon known as deterministic
chaos. Fig. 4(c) shows the model exhibiting such chaotic
behavior; there is no longer a discernible repeating pattern to
the series, which has become aperiodic. A comparison of
Fig. 4(c) and (d) illustrates sensitive dependence on initial
conditions (sdic), known to be a characteristic of chaotic
evolutions. Both series emanate from identical system
arrangements, i.e. the company policies are the same in
each case, but the initial values of the evolutions, as
specified by (RA0, RB0), differ slightly: initial conditions
were (10.0, 15.0) and (10.1, 15.0) for Fig. 4(c) and (d),
respectively. The marked difference in the two (chaotic)
evolutions, as a result of sdic, suggests serious, fundamental
limitations to forecasting, control and planning where such
system arrangements exist.
A useful illustrative tool in the analysis of systems,
which pursue the period doubling route to chaos, is a
bifurcation diagram. A bifurcation diagram indicates how
the post-transient, limiting behavior of a system alters as one
parameter is varied. One of its great strengths is that it
provides a more general, global view of the system's
behavior for a variety of parameter settings; in this case,
company policies. More specifically, for this discretely
evolving model, the bifurcation diagram shown in Fig. 5
identifies the values of a particular system variable (say
RAt) present in the post-transient evolution, plots these
values against the corresponding value of the parameter,
and repeats this for a range of parameter values. The

Fig. 4. (a) Period 2 oscillations of RBt for system arrangement (c, d) = (+0.1, ÿ4.0), initial conditions (RA0, RB0) = (10.0, 15.0). (b) Period 4 oscillations
of RBt for system arrangement (c, d) = (+0.1, ÿ4.18), initial conditions (RA0, RB0) = (10.0, 15.0). (c) Chaotic behavior of RBt for system arrangement
(c, d) = (+0.1, ÿ4.5), initial conditions (RA0, RB0) = (10.0, 15.0). (d) Chaotic behavior of RBt for system arrangement as in (c), initial conditions (RA0,
RB0) = (10.1, 15.0).
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Fig. 5. Bifurcation diagram for (+,ÿ) system arrangements; policy
parameter d varying.
evolutions have the same starting values (RA0 and RB0) in
each case.
A comparison between a time series and its representa-
tion in a bifurcation diagram helps clarify the structure of
the latter. The post-transient periodic motion of Fig. 3(a), for
example, comprises two values of RAt, which together
constitute the oscillations. Looking at the system's bifurca-
tion diagram in Fig. 5, it can be seen that for policy
parameter d = ÿ3.8 (with c = 0.1) two values of RAt are
plotted, shown at f in the diagram, thereby indicating a
period 1 oscillation. It follows that the single value of RAt
plotted for policy d = ÿ3 indicates one value of RAt in the
corresponding time series, i.e. equilibrium (see g in the
diagram). In a similar way, period 2 and period 4 behaviors,
such as those shown by RBt in Fig. 4(a) and (b), respec-
tively, correspond to instances where evolutions comprise
four and eight variable-values in turn, as shown on the
diagram at h and i, respectively. The parameter region of the
bifurcation diagram, for which a seemingly continuous but
bounded range of RAt are present, represents chaos.
As before, analysis of the system's feedback structure
sheds light on the tendency of (+,ÿ) arrangements to
oscillate for these conditions. On iteration, company B, with
its sensitive counteracting policy, tends to relax given its
initial advantage and spends less on R&D in the next period.
Simultaneously, the smaller reinforcing policy of A acts to
reinforce its initial disadvantage. Due to its more sensitive
counteracting policy, however, it is B, which has the
stronger initial reduction, and accordingly, the system soon
evolves so that RBt < RAt (and by evolution SBt < SAt). In
this state, B's counteracting policy then acts to increase RBt
while A's reinforcement has a similar but weaker self-
increasing effect. Together, these effects cause evolution to
a state where SBt > SAt. This vacillation of the position of
advantage continues throughout the evolution, i.e. in these
conditions the system is prone to oscillation.
187
4.2.4. Scenario 4
Oscillations, period doubling, and chaotic behavior simi-
lar to that described above were again obtained for certain
parameter values for a fourth type of (+,ÿ) arrangement.
The relative sensitivities of the policies were similar to those
for the conditions producing the oscillations and chaos
described above, but here, the initial conditions were such
that the counteracting company started with the smaller
allocation (RA0 > RB0). The tendency for oscillation could
be explained by the fact that for these conditions, the
sensitive counteracting B acts to remedy its initial disad-
vantage, while the less sensitive reinforcing A tends to
increase its advantage. As before, B's effect is the stronger,
so that the system evolves to a state where RBt > RAt, and
the policies now engender opposite effects. This change in
direction of the effects due to policy occurs repeatedly, and
it follows that for these conditions, there is a tendency for
the system again to oscillate.
4.3. Arrangement group (ÿ,ÿ)
In this group, both companies adopt a counteracting
policy. At all times, the leading company invests less in
the next period while the trailing company moves to invest
more. For these arrangements, the managers of both firms
act so as to decrease any extant difference in their perfor-
mance. Investigations were carried out on arrangements
where one company, say B, had a decidedly more sensitive
policy than its competitor and initial conditions such that
RA0 6ˆ RB0 ()SA0 6ˆ SB0). For these conditions, oscilla-
tion occurred for certain parameter values, as shown for
variables RAt and RBt in Fig. 6(a) and (b). It is interesting
that while for the (ÿ,+) group, RAt and RBt oscillated in
phase, as shown earlier, the (ÿ,ÿ) results show oscillations
in anti-phase, i.e. one's maxima coincide with the other's
minima. Period doubling bifurcations to chaos were ob-
served as the modulus of the more strongly negative para-
meter was increased (representing an increase in the
sensitivity of that company's counteracting policy) as illu-
strated in Fig. 6(c) ± (e). The corresponding bifurcation
diagram is shown for variable RAt in Fig. 7, while a
comparison between Fig. 6(e) and (f) shows that the anti-
phase relationship between the evolutions of RAt and RBt
(and so SAt and SBt) persists into the chaotic regime.
It was found that for (ÿ,ÿ) arrangements where the
competitors adopted policies of similar sensitivity, the
tendency for oscillation was reduced and RAt and RBt
(and so with SAt and SBt) pursued a monotonic approach
to an equilibrium between RA0 and RB0 (and between SA0
and SB0).
Again, the system's oscillatory behavior can be under-
stood from a consideration of its feedback structure. For
the case when B has the notably more sensitive policy, its
corrections (i.e. reductions to RBt when in a position of
advantage, and increases when disadvantaged) will be
larger than those of its competitor. Reasoning as before
188 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191

Fig. 6. (a) Period 1 oscillations of RAt for system arrangement (c, d) = (ÿ0.1, ÿ3.0), initial conditions (RA0, RB0) = (10, 5.0). (b) Period 1 oscillations of RBt
for system arrangement and initial conditions as for (a). (c) Period 2 oscillations of RBt for system arrangement (c, d) = (ÿ0.1, ÿ3.8), initial conditions (RA0,
RB0) = (10, 5.0). (d) Period 4 oscillations of RBt for system arrangement (c, d) = (ÿ0.1, ÿ3.99), initial conditions (RA0, RB0) = (10, 5.0). (e) Chaotic behavior
of RAt for system arrangement (c, d) = (ÿ0.1, ÿ4.15), initial conditions (RA0, RB0) = (10, 5.0). (f) Chaotic behavior of RBt, system arrangement and initial
conditions as for (e).

suggests that for these conditions, the system is prone to tion process by permitting variation over time of the policy
oscillation where the scale of variation of the more parameters c and d.
sensitive company is substantially greater than that of
the competition. 5.1. Adaptation mechanisms

Two different representations of adaptation were in-

5. An adaptive model: the learning organization
The basic model outlined above describes managerial
adjustments to resource allocations, but makes no allowance
for any change over time in the policy concerning these
adjustments. This constitutes a serious limitation of the
model as, in reality, it is to be expected that the strategy
adopted will change, reflecting the decision-maker's percep-
tion of recent-policy efficacy. For an intelligent management
(or the ``learning organization''), there will be attempts to
adapt to previous shortcomings. The basic model was
therefore extended to include a mechanism for this adapta-
cluded separately in the adaptive model, the management
in both cases contemplating a policy change every f
periods (e.g. quarterly or annually). In deciding whether
to make a change, the manager (of, say, A) was considered
to examine the company's performance relative to that of
the competitor over each of the f periods since the last
deliberation. The sum of these relative performances (M)
was used
P as an overall measure, where, at period t,
M ˆ ttÿf SAi ÿ SBi . If M > 0, the current policy was
considered satisfactory, while M < 0 was taken to indicate
a need for change. This is admittedly a simple criterion for
assessment, which makes no allowance for trends. In
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Fig. 7. Bifurcation diagram for (ÿ,ÿ) system arrangements; policy
parameter d varying.
particular, a negative value of M would be returned for a
trailing company that is steadily reducing its deficit over
the f periods. In such cases, the policy would, to some
extent, be working satisfactorily and yet the negative value
of M would precipitate its modification. Nevertheless, the
criterion does provide a basis for introducing managerial
assessment of performance into the model; the effect of
more complicated adaptation must await future research.
It was in the adjustment rule that the two adaptation
mechanisms differed. In one, termed proportional policy
adaptation, a change amounted to a proportional reduction
in the extremity of a policy while maintaining its nature
Fig. 8. (a) Evolution of RBt with proportional adaptation mechanism. (b)
Further evolution of RBt with proportional adaptation mechanism.
189
(counteracting or reinforcing, as represented by the sign of
the parameter). Specifically, this reduction was executed in
the model by multiplying the appropriate company's policy
parameter by a reducing factor, ac or ad (0 < ac, ad < 1),
so that ck = acckÿ1 or dk = ad dkÿ1, where the index k
describes a particular stretch of f time periods. The same
values of ac and ad were used throughout a given evolu-
tion, i.e. for each change, policy extremity was reduced by
a constant proportion. Managers adopting proportional
adaptation are mindful of the extremity of the policies they
change. It is notable that for this first mechanism, the
nature of the individual company's policy (counteracting
or reducing) does not change, and so the varying system
arrangement will belong to the same group ((+,ÿ), etc.)
throughout the evolution.
In the second mechanism, absolute policy adaptation, a
change was executed by adding a constant amount, bc or bd,
to the appropriate policy parameter, giving ck = ckÿ1 + bc or
dk = dkÿ1 + bd; the sign of the constant values for bc and bd
were in each case chosen to make the initial change a
reduction in policy extremity. For this mechanism, a para-
meter changes by an absolute amount, independent of the
parameter value. Managers adopting absolute adaptation
take no account of the extremity of the policies they change.
For such actions, it follows that during an evolution, the
nature of a company's policy can change from counteracting
to reducing or vice-versa, and the system arrangement can
wander between groups. A consequence of this is that a
system initially classified by one type of behavior by virtue
of its arrangement/initial conditions, can, on changing
arrangement group, develop to a different mode typical of
that group.
Fig. 9. (a) Evolution of RAt with absolute adaptation mechanism. (b)
Further evolution of RAt with absolute adaptation mechanism.
190 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
Fig. 10. (a) Values of ct during absolute evolution shown in Fig. 9. (b)
Values of dt during absolute evolution shown in Fig. 9.
5.2. Simulation results for the adaptive model
Examples of the system evolutions obtained from the
proportional and absolute adaptation mechanisms are shown
in Figs. 8 and 9. Fig. 8(a) and (b) describe typical results for
proportional adaptation; ac and ad were set at values of 0.8
and 0.9, respectively with (c0, d0) at (+0.1, ÿ5.0). The early
erratic behavior (containing some initial transients) stemmed
from a chaotic regime, but reductions in the size of the
policy parameters effected a settling to periodic behavior for
which further reductions caused decreases in amplitude, as
illustrated. In a sense, the proportional adaptation mechan-
ism can be thought of as leading the system through various
bifurcations, from more complicated to simple behavior.
Reducing the values of ac and/or ad increases the rate with
which this simplification occurs, as does increasing the
frequency of policy adjustments ( f ).
Fig. 9 shows typical results for absolute adaptation with
bc and bd set at ÿ0.05 and +0.2, respectively and (c0, d0)
at (+0.13, ÿ5.0). Generally, a system evolving by absolute
adaptation was not found to exhibit simply damped oscil-
lations, but more complicated, less predictable behavior.
Fig. 9(a) shows indications of initial damping, but oscilla-
tions become more violent in Fig. 9(b) at t = 90. This
scope for more complicated development with absolute
adaptation is explained by the ability of a policy parameter
to change its sign and subsequently increase in size,
corresponding to a change in policy type followed by an
increase in sensitivity. The values of the evolving ct and dt
are shown in Fig. 10, with a change in sign of ct being
evident in Fig. 10(a).
6. Conclusions
In this paper, competitive interactions under conditions
of duopoly have been represented by a model and support-
ing computer simulations. The model related R&D expen-
ditures in each of two firms working in a duopoly market to
product quality or technological endowment. Expenditure
by one firm, firm A, changed in the light of product quality
differences in A's offering to consumers compared to the
offering by B. Similarly, B's expenditure on R&D changed
in the light of product quality differences between B's and
A's consumer offerings. The notion that management will
vary R&D spending according to competitive or relative
product quality or technological endowment does not
appear unreasonable. Various assumptions were made about
the nature of these changes and it was shown that under
certain circumstances, oscillatory, including chaotic, beha-
vior could result. That is to say, behavioral outcomes could
fluctuate and eventually become random-like and see-
mingly unpredictable.
While the model describes innovation, linking R&D
spending to product quality or technological endowment,
its structure is sufficiently generic to apply when other
microeconomic relationships shape competitive decision-
making in the firm. In general, the model could represent
a duopoly where decisions regarding the extent of an input
or resource allocation are, for both organizations, made in
the light of the recent standard of achievement relative to
that of the competitor, and where these standards are,
themselves, a direct result of previous inputs/resources
applied. One obvious extension would be to levels of
marketing expenditure across a duopolistic market, where
marketing spending is a function of consumers' perceptions
of the firm's and competitor's product offerings.
Although the basic model demonstrates the possibility of
chaotic outcomes in conditions of duopoly, it is difficult to
be confident that the equations provide a complete and fair
representation of how managers make decisions about R&D
spending in reality. Concern is shared with Allen (1994),
Levy (1994), Stewart and Cohen (1994), and others regard-
ing the application of simple decision rules in the modeling
of human behavior. As Levy (1994) observes: ``Human
agency can alter the parameters and very structures of social
systems . . .''. In addition, as they stand the equations used
are uncalibrated and any attempts at calibrations or, subse-
quently, testing would present substantial difficulties.
Furthermore, the attractor describing a dynamical system
will change if any actors succeed in learning which para-
meters are important and adapt their behavior accordingly.
Towards the end of the study, some initial steps were taken
to incorporate managerial attempts to adapt within the
model, akin to adaptation in ``learning organizations.''
These measured changes by management could (but not
necessarily would) forestall chaotic outcomes. The implica-
tion, therefore, is that with a suitable awareness of the
possible results from adaptive adjustments, and the implica-
 S. Whitby et al. / Journal of Business Research 51 (2001) 179±191
tions of actions when paired with those of the competition
(i.e. a more global view of system behavior, such as that
given by bifurcation diagrams), appropriate management
actions could be taken to forestall chaotic outcomes.
Conditions of chaos will obviously be very troublesome
to managers intent on forecasting markets and planning
and controlling their organization: both the lack of order
in behavior over time and the property of sdic reduce the
possibility of effective management judgement. It follows,
therefore, that for two duopolistic competitors intent on
ordered trajectories, there are great benefits to be had if
both have a knowledge of their combined behavior and
the pairings of their individual policies over the relevant
range of parameter space. If this were the case, then for
both organizations, chaos could be more easily avoided
and more regular time paths achieved. This implies that an
aspect of co-operation (or at least honesty with a compe-
titor regarding policy) would be desirable if unexpected
outcomes are to be prevented. This conclusion, in turn,
has implications for competition policy: collaboration
between duopolists may help to dampen what otherwise
would be highly erratic fluctuations in the market place
(here reflected in applications of R&D resources), suggest-
ing that collaboration could, in this sense, possibly be
welfare-enhancing.
Turning to the possibilities for future research, an ob-
vious refinement to the study would be the extension of the
decision rules to allow for more flexible management
policies and the inclusion of time lags between resource
allocation and the resulting changes, e.g. in product stan-
dard. Initial work incorporating such a time lag suggests that
the system is dampened, but for reasons that are not entirely
clear. In addition, the model could be amplified to include
additional competition, i.e. an extension from duopoly to
oligopoly. At a time when industry is moving towards ``lean
supply'' manufacturing, which involves reduced time lags
between consumer orders and input supplies, the possible
critical effect of time lags on the behavior of economic
systems has important policy implications.
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