Analysis Pareto–Nash–Stackelberg Solutions in Sugar Market Pricing

Abstract

Within the oligopolistic market, the decisions made by each company regarding price, production or marketing strategy directly influence the reactions and performances of competitors. In such an environment, characterized by a small number of participants and pronounced interdependence, producers frequently face complex decision-making problems, the solution of which directly determines the level of profit obtained. One of the most important strategic decisions is pricing, especially for companies that offer similar products, such as sugar, where competition is intense and differentiation is low. The paper analyzes the strategic behavior of local sugar producers, considered as two main players, using the Bertrand model with limited capacity (Edgeworth, 1889) and discretized Bertrand model. These models provide a relevant framework for situations where companies compete on price but simultaneously face constraints related to production capacity, which complicates market equilibrium and a framework for equal production capacities that individually cover demand. In the proposed analysis, two possible pricing strategies are considered for each producer, and the results are evaluated in terms of profit obtained for each combination of decisions. In addition to the Nash and Stackelberg solutions in pure strategies, the solutions in mixed strategies are also determined by applying established algorithms that allow the identification of the set of Nash equilibria in mixed strategies (Ungureanu, 2017), the set of Stackelberg equilibria in mixed strategies (Lozan and Ungureanu, 2010), as well as the set of Pareto-Nash solutions in mixed strategies (Lozan and Ungureanu, 2012a) and the set of Pareto-Stackelberg equilibria in mixed strategies (Lozan and Ungureanu, 2012b). This approach provides a more detailed picture of how strategic interaction between sugar producers can lead to efficient outcomes for the entire market. JEL: C02, C61, C62, C65, C72, C79