Price-taking Strategy Versus Dynamic Programming in Oligopoly
AbstractIn 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.
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Bibliographic InfoPaper provided by Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre in its series Economic Growth centre Working Paper Series with number 0904.
Length: 18 pages
Date of creation: Apr 2009
Date of revision:
Economics; dynamic programming; Bellman’s optimality principle; applied OR; duopoly;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
- NEP-COM-2009-09-26 (Industrial Competition)
- NEP-IND-2009-09-26 (Industrial Organization)
- NEP-SEA-2009-09-26 (South East Asia)
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