Beyond myopic best response (in Cournot competition)

Amos Fiat*, Elias Koutsoupias, Katrina Ligett, Yishay Mansour, Svetlana Olonetsky

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

6 Scopus citations

Abstract

A Nash Equilibrium is a joint strategy profile at which each agent myopically plays a best response to the other agents' strategies, ignoring the possibility that deviating from the equilibrium could lead to an avalanche of successive changes by other agents. However, such changes could potentially be beneficial to the agent, creating incentive to act non-myopically, so as to take advantage of others' responses. To study this phenomenon, we consider a non-myopic Cournot competition, where each firm selects whether it wants to maximize profit (as in the classical Cournot competition) or to maximize revenue (by masquerading as a firm with zero production costs). The key observation is that profit may actually be higher when acting to maximize revenue, (1) which will depress market prices, (2) which will reduce the production of other firms, (3) which will gain market share for the revenue maximizing firm, (4) which will, overall, increase profits for the revenue maximizing firm. Implicit in this line of thought is that one might take other firms' responses into account when choosing a market strategy. The Nash Equilibria of the non-myopic Cournot competition capture this action/response issue appropriately, and this work is a step towards understanding the impact of such strategic manipulative play in markets. We study the properties of Nash Equilibria of non-myopic Cournot competition with linear demand functions and show existence of pure Nash Equilibria, that simple best response dynamics will produce such an equilibrium, and that for some natural dynamics this convergence is within linear time. This is in contrast to the well known fact that best response dynamics need not converge in the standard myopic Cournot competition. Furthermore, we compare the outcome of the non-myopic Cournot competition with that of the standard myopic Cournot competition. Not surprisingly, perhaps, prices in the non-myopic game are lower and the firms, in total, produce more and have a lower aggregate utility.

Original languageAmerican English
Title of host publicationProceedings of the 23rd Annual ACM-SIAM Symposium on Discrete Algorithms, SODA 2012
PublisherAssociation for Computing Machinery
Pages993-1005
Number of pages13
ISBN (Print)9781611972108
DOIs
StatePublished - 2012
Externally publishedYes
Event23rd Annual ACM-SIAM Symposium on Discrete Algorithms, SODA 2012 - Kyoto, Japan
Duration: 17 Jan 201219 Jan 2012

Publication series

NameProceedings of the Annual ACM-SIAM Symposium on Discrete Algorithms

Conference

Conference23rd Annual ACM-SIAM Symposium on Discrete Algorithms, SODA 2012
Country/TerritoryJapan
CityKyoto
Period17/01/1219/01/12

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