Price-taking Strategy Versus Dynamic Programming in Oligopoly

Weihong Huang ()

No 904, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: In a quantity-competed duopoly, one firm is a naive price-taker (who responses only to the last period’s price) while the other has all the market information so as be able to optimize its profit stream (either discounted or un-discounted) dynamically over a finite or infinite horizon. With a traditional linear economy, we are able to derive algebraically the optimal policies of all periods for the dynamic optimizer. A counter-intuitive phenomenon is then observed: regardless of the planning horizon and the discounted factor, there exists a relative profitability range of initial prices, starting with which the price-taker make higher profit than the dynamic optimizer. Furthermore, with the increase in the planning horizon, the price-taker’s relative profitability range increases accordingly and finally covers the entire economically meaningful range.

Keywords: Economics; dynamic programming; Bellman’s optimality principle; applied OR; duopoly (search for similar items in EconPapers)
Pages: 18 pages
Date: 2009-04
New Economics Papers: this item is included in nep-com, nep-ind and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:nan:wpaper:0904

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