IDEAS home Printed from https://ideas.repec.org/p/nan/wpaper/0904.html
   My bibliography  Save this paper

Price-taking Strategy Versus Dynamic Programming in Oligopoly

Author

Listed:
  • HUANG Weihong

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore
    Nanyang Technological University, Singapore)

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.

Suggested Citation

  • HUANG Weihong, 2009. "Price-taking Strategy Versus Dynamic Programming in Oligopoly," Economic Growth Centre Working Paper Series 0904, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:0904
    as

    Download full text from publisher

    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2009/2009-04.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Huang, Weihong, 2008. "The long-run benefits of chaos to oligopolistic firms," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1332-1355, April.
    2. Dana, Rose-Anne & Montrucchio, Luigi, 1987. "On rational dynamic strategies in infinite horizon models where agents discount the future," Journal of Economic Behavior & Organization, Elsevier, vol. 8(3), pages 497-511, September.
    3. Haurie, A., 1976. "Optimal control on an infinite time horizon : The turnpike approach," Journal of Mathematical Economics, Elsevier, vol. 3(1), pages 81-102, March.
    4. J. W. Friedman, 1968. "Reaction Functions and the Theory of Duopoly," Review of Economic Studies, Oxford University Press, vol. 35(3), pages 257-272.
    5. Dana, Rose-Anne & Montrucchio, Luigi, 1986. "Dynamic complexity in duopoly games," Journal of Economic Theory, Elsevier, vol. 40(1), pages 40-56, October.
    6. R. M. Cyert & M. H. DeGroot, 1970. "Multiperiod Decision Models with Alternating Choice as a Solution to the Duopoly Problem," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 410-429.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Economics; dynamic programming; Bellman’s optimality principle; applied OR; duopoly;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nan:wpaper:0904. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Magdalene Lim). General contact details of provider: http://edirc.repec.org/data/dentusg.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.