Abstract

In this paper we will evaluate the significance of the inclusion of “dynamics” in profit maximization for widely used demand functions. Specifically we will consider both linear and log-linear demand models. Using these demand functions we will obtain closed form solutions for optimum prices (dynamic market inverse elasticity laws). The optimum price in a market governed by dynamic demand response is different from the one within a static response framework; we will relate the differences to specific characteristics of the demand function. One focus of this work will be to develop intuitive explanations for our conclusion regarding the relative size of the optimum price in static and dynamic markets.

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