Demand, cost and prices in duopoly

Abstract

This study examines the effects of demand shifts upon the duopoly price level. The tool is a set of rich simulation models that include uncertainty, a multi-period horizon, learning, and realistic interseller competition embodying customer inertia. The context is comparative dynamics in which the only change is in the demand curve variations. Surprisingly, it is found that a proportional increase in the demand function may either raise or lower price. The outcome depends upon the shape of the cost curve. If marginal cost is declining, an increase in demand leads to a decrease in price. If marginal cost is increasing, an increase in demand leads to a decrease in price. If marginal cost is constant, price is unaffected by a proportional change in demand. Changes in elasticity have the same effect on price in duopoly as in monopoly. These findings suggest that a short-run decrease in consumption of an oligopolized product will not lead to a reduced real price, given reasonable assumptions about the nature of the demand and supply functions.