Behavioral choices in a dynamic duopoly with process innovation and sticky price: Myopia versus farsightedness

Abstract

This paper investigates the impacts of sticky price and behavioral choices on the operation decisions, firm's profits, and social welfare. Each player has either myopic behavior or farsighted behavior. Results show that (i) players prefer farsighted behavior, which can achieve the Pareto optimality, and (ii) when both players are farsighted, they will set a higher price but will have an insufficient‐effort problem in process innovation. Furthermore, by comparing the social welfare in four different scenarios, we find that the social welfare is the highest when both players are myopic.

State aid and the learning‐by‐doing effect on product pricing

“…In many instances, dynamic pricing literature studies the attributes of the demand function (Rubel, 2013; Zhang et al, 2014) but is regardless to quality improvements due to innovation. Recent literature is sensitive to the effect of (process) innovation on cost reducing and competitiveness (Zhang & Cheng, 2020).…”