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Price-taking Strategy Versus Dynamic Programming in Oligopoly

Author

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  • 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
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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2009/2009-04.pdf
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    References listed on IDEAS

    as
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    Keywords

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