The dynamic game theory—which is commonly used to study pricing methods in oligopolic situations—is introduced in this chapter through the dynamic optimization perspective. A model of dynamic games involves identifying two players that are both attempting to solve the standard problem of dynamic optimization through making use of a variable to denote the vector state. While the return factor and the discount factor may be specific, each player is expected to maximize a certain Lagrangean expression that is subject to a particular constraint. Depending on the empirical problems, one can utilize either the Nash solution wherein each player is to solve the optimization problem by taking the other player’s decision as given, or the Stakleberg solution which assigns a dominant player.
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