Stochastic Switching Games and Duopolistic Competition in Emissions Markets
AbstractWe 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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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1001.3455.
Date of creation: Jan 2010
Date of revision: Aug 2010
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-30 (All new papers)
- NEP-CMP-2010-01-30 (Computational Economics)
- NEP-ENE-2010-01-30 (Energy Economics)
- NEP-ENV-2010-01-30 (Environmental Economics)
- NEP-GTH-2010-01-30 (Game Theory)
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