Dynamic Game Results of the Acquisition of New Technology

Cheryl Gaimon
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Cheryl Gaimon: Georgia Institute of Technology, Atlanta, Georgia

Operations Research, 1989, vol. 37, issue 3, 410-425

Abstract: Open and closed-loop Nash strategies are derived and analyzed for a differential game in which two competing firms choose prices and productive capacity where new technology reduces a firm's unit operating cost. Using an open-loop strategy, a firm makes an irreversible commitment to a future course of action. For example, a contract with a labor union may force a firm to commit to maintaining its entire workforce regardless of its competitor's future realized behavior. In contrast, using a closed-loop strategy, a firm's decisions evolve over time, continuously responding to the competitor's behavior. The dynamic Nash strategies obtained for the closed-loop model exhibit a more restricted acquisition of new technology and a greater reduction of existing capacity relative to the open-loop solutions. In addition, the dynamic Nash price to be charged for output is higher in the closed as opposed to open-loop competitive environment. Numerical solutions are presented to demonstrate that if both firms apply the closed-loop approach, each will earn higher profits than if one or both firms choose an open-loop strategy.

Keywords: facilities/equipment planning; capacity expansion: dynamic solutions for technology acquisition and pricing; games/group decisions; differential: dynamic open and closed loop technology acquisition and pricing solutions; marketing: pricing impact of new technology on competitive pricing (search for similar items in EconPapers)
Date: 1989
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Citations: View citations in EconPapers (18)

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