RIEB Discussion Paper Series No.2022-19

Title

Firm's Static Behavior under Dynamic Demand

Abstract

This study investigates in what cases a firm's dynamic price-setting behavior can be approximated as static under dynamic demand, by developing a dynamic discrete choice model. Under dynamic demand with random utility shock following Gumbel distribution, this study shows that an oligopolistic firm's optimal price-setting behavior is well approximated by the static one with no strategic consideration, when consumers' conditional choice probabilities (CCPs) of choosing the firm's product are small for all consumer types and state variables. If the condition does not hold, the firm's behavior might be far from static.

Keywords

Dynamic demand; Dynamic price-setting behavior; Static approximation; Monopolistic competition; Dynamic discrete choice

Inquiries

Takeshi FUKASAWA
Graduate School of Economics, The University of Tokyo
7-3-1, Hongo, Tokyo, JAPAN
Junior Research Fellow, RIEB, Kobe Univesity