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The robustness of industrial commodity oligopoly pricing strategies

Author

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  • David M. Newbery

    (Imperial College London and EPRG Cambridge)

  • Thomas Greve

    (Imperial College London and EPRG Cambridge)

Abstract

Industrial commodity markets are typically oligopolies in which firms set prices but need to make sunk and durable investment decisions, requiring them to make predictions of future prices. Mark-up pricing models are attractive both for setting prices and predicting future prices for investment analysis. Simple algorithms can find Nash equilibria, but these equilibria are not necessarily robust. This paper examines fixed and proportional mark-up models and demonstrates that they are robust to single firm Nash Cournot deviations but not against more sophisticated deviations in the deterministic case. Cournot equilibria are not robust under demand uncertainty, where proportional mark-up models emerge as the most robust when marginal costs are increasing.
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Suggested Citation

  • David M. Newbery & Thomas Greve, 2015. "The robustness of industrial commodity oligopoly pricing strategies," Working Papers EPRG 1522, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    • Handle: RePEc:enp:wpaper:eprg1522
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    References listed on IDEAS

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    Cited by:

    1. Newbery, David M. & Greve, Thomas, 2017. "The strategic robustness of oligopoly electricity market models," Energy Economics, Elsevier, vol. 68(C), pages 124-132.
    2. Gori, Luca & Sodini, Mauro, 2017. "Price competition in a nonlinear differentiated duopoly," Chaos, Solitons & Fractals, Elsevier, vol. 104(C), pages 557-567.

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    More about this item

    Keywords

    market modelling; mark-up equilibria; robustness; oligopoly;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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