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A Dynamic Oligopoly with Price Stickiness and Risk-Averse Agents

Author

Listed:
  • Edilio Valentini

    (University of Chieti-Pescara)

  • Paolo Vitale

    (University of Chieti-Pescara)

Abstract

In this paper we present a dynamic discrete-time model that allows to investigate the impact of risk-aversion in an oligopoly characterized by a homogeneous non-storable good, sticky prices and uncertainty. The continuous-time limit of our formulation nests the classical dynamic oligopoly model with sticky prices by Fershtman and Kamien (Econometrica 55:1151–1164, 1987) and extends it by accommodating uncertainty and risk-aversion. We show that in the continuous-time limit of our infinite horizon formulation the optimal production strategy and the consequent equilibrium price are, respectively, directly and inversely related to the degrees of uncertainty and risk-aversion. However, the effect of uncertainty and risk-aversion crucially depends on price stickiness since, when prices can adjust instantaneously, the steady state equilibrium in our model with uncertainty and risk-aversion collapses to Fershtman and Kamien’s analogue.

Suggested Citation

  • Edilio Valentini & Paolo Vitale, 2022. "A Dynamic Oligopoly with Price Stickiness and Risk-Averse Agents," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 8(3), pages 697-718, November.
    • Handle: RePEc:spr:italej:v:8:y:2022:i:3:d:10.1007_s40797-021-00153-4
    DOI: 10.1007/s40797-021-00153-4
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    References listed on IDEAS

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