Price dynamics in a strategic model of trade between two regions

TL;DR

This paper presents a strategic model analyzing how prices adjust towards equilibrium between two regions, considering output, resources, and transportation costs, with insights into different equilibrium types and effects of disturbances.

Contribution

It introduces a novel strategic framework for trade price dynamics between regions, analyzing equilibrium conditions and comparing discrete and continuous-time convergence paths.

Findings

Different Nash equilibria depend on output and financial resource relations.

Discrete and continuous-time dynamics show substantially different convergence behaviors.

Random disturbances impact continuous-time price dynamics significantly.

Abstract

This paper develops a strategic model of trade between two regions in which, depending on the relation among output, financial resources and transportation costs, the adjustment of prices towards an equilibrium is studied. We derive conditions on the relations among output and financial resources which produce different types of Nash equilibria. The paths obtained in the process of converging toward a steady state for prices under discrete-time and continuous-time dynamics are derived and compared. It turns out that the results in the two cases differ substantially. Some of the effects of random disturbances on the price dynamics in continuous time are also studied.