Strategic Management of Palm Oil Price Dynamics Using a Game-Theoretical Approach

Abstract

As the most widely traded vegetable oil in the world, the primary objective of palm oil stakeholders is to maximise returns, which are driven by price and demand. Price fluctuations are a natural and necessary aspect of a competitive market; however, its unpredictability can significantly diminish returns. Price theory suggests that the existence of a close substitute, such as soybean oil, can substantially impact the dynamics of the palm oil market due to their similar end-product applications. As a result, their prices have grown increasingly competitive as demand shifts in response to their relative pricing. This paper proposes a game-theoretical approach to managing the dynamics of palm oil prices, with a particular emphasis on market interactions between palm oil and soybean oil. The model uses supply as a decision variable, allowing palm oil stakeholders to optimise returns by balancing pricing and demand. In addition to reducing price fluctuations to enhance returns, the methodology can also help to improve sustainability by preventing oversupply, and avert escalating prices that may jeopardise global food security.