Uncertainty and Risk-aversion in a Dynamic Oligopoly with Sticky Prices

38 Pages Posted: 2 Apr 2019

See all articles by Edilio Valentini

Edilio Valentini

Universita D'Annunzio

Paolo Vitale

G. d'Annunzio University - Dipartimento di Economia

Date Written: November 2018

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. Our model nests the classical dynamic oligopoly model with sticky prices by Fershtman and Kamien (Fershtman and Kamien, 1987), which can be viewed as the continuous-time limit of our model with no uncertainty and no risk-aversion. Focusing on the continuous-time limit of the infinite horizon formulation we show that 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.

Keywords: Uncertainty, Risk-aversion, Dynamic Oligopoly

JEL Classification: D8, D81, L13

Suggested Citation

Valentini, Edilio and Vitale, Paolo, Uncertainty and Risk-aversion in a Dynamic Oligopoly with Sticky Prices (November 2018). FEEM Working Paper No. 3.2019, Available at SSRN: https://ssrn.com/abstract=3364170 or http://dx.doi.org/10.2139/ssrn.3364170

Edilio Valentini (Contact Author)

Universita D'Annunzio ( email )

Dept. of Quantitative Methods & Economic Theory
I-65127 Pescara
Italy

Paolo Vitale

G. d'Annunzio University - Dipartimento di Economia ( email )

I-65127 Pescara, Pescara
Italy
+39 085 453 7647 (Phone)
+39 085 453 7565 (Fax)

HOME PAGE: http://www.unich.it/~vitale/

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