Monopoly and lagged demand adjustments

In a dynamic optimisation model the profit maximising behaviour of a monopolist facing lagged adjustments of demand is investigated. It is shown that the long run equilibrium price differs from the static Cournot price. The monopolist sacrifices some of the long run profits in order to exploit the short run inelasticity of demand. If applied to OPEC and the world petroleum market, the model is able to explain the ups and downs of the oil price during the seventies and eighties.