Abstract

The notion of Nash equilibrium in static oligopoly games is based on the assumption that each firm knows its entire demand curve (and, therefore, its entire profit function). It is much more likely, however, that firms only have some idea of the outcome of small price variations within some relatively small interval of prices. This is because firms can only learn their demand functions through price experiments and if they are risk-averse and/or have a low discount factor, they will be unwilling to engage in extensive price experiments involving large variations in price. We can therefore expect firms to experiment through small price variations and stop when they reach a price such that no small deviation..