Stochastic Switching Games and Duopolistic Competition in Emissions Markets

DOI10.1137/100784977MaRDI QIDQ5388673zbMATH OpenOpenAlexFDO

Authors Michael Ludkovski

Publication date 19 April 2012

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1001.3455

zbMATH Keywords

correlated equilibriumdynamic gamesswitching gamesemission abatement programm

Mathematics Subject Classification ID

2-person games (91A05) Production models (90B30) Stochastic games, stochastic differential games (91A15) Financial applications of other theories (91G80)

Abstract: We study optimal behavior of energy producers under a CO_2 emission abatement program. We focus on a two-player discrete-time model where each producer is sequentially optimizing her emission and production schedules. The game-theoretic aspect is captured through a reduced-form price-impact model for the CO_2 allowance price. Such duopolistic competition results in a new type of a non-zero-sum stochastic switching game on finite horizon. Existence of game Nash equilibria is established through generalization to randomized switching strategies. No uniqueness is possible and we therefore consider a variety of correlated equilibrium mechanisms. We prove existence of correlated equilibrium points in switching games and give a recursive description of equilibrium game values. A simulation-based algorithm to solve for the game values is constructed and a numerical example is presented.

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(4)

• AHEAD: \textit{ad hoc} electronic auction design
• A Stackelberg-Nash-Cournot equilibrium in a pollution reduction scheme
• On the equality of solutions of max-min and min-max systems of variational inequalities with interconnected bilateral obstacles
• An impulse-regime switching game model of vertical competition

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