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Pricing in a Dynamic Model with Saturation

H. J. Landau

Abstract

We consider a situation in which demand for a product increases with the amount of it already in existence, up to some level of saturation. We focus on the effect of such a phenomenon on the decisions of a producer. A producer who takes this growth pattern into account can obtain a larger discounted profit than one who looks at the market myopically. We show that, under general conditions, the producer's optimal output sequence here leads to lower prices, so that the consumers benefit simultaneously.