Investment and pricing strategies of competing firms: A computational approach

We analyze the classical investment and pricing problem of a dominant firm faced with competition from substitute industries or marginal firms in the same field. The firm owns a finite level of a resource (e.g. the stock of an exhaustible one), the consumption of which is to be divided optimally over a finite planning horizon. The competitors' measures affect the demand for the resource towards the dominating firm. Rising crude oil prices and investments in forms of alternative energy are representative examples of the strategic questions which involve competitive and contradictory interests among firms within an industry. The investment and pricing problem can be solved analytically only with strong, simplifying assumptions. To make the analysis simpler and to relax these restrictions, we combine a series of numerical tools, computerize them, and build up a user-oriented, computerized decision aid, which we call a ‘computerized approach’. We solve the problem under different sets of theoretical assumptions. This chosen incremental theory building allows us to study the theoretical sensitivity of the original problem.