Stochastic games offer a rich mathematical structure that makes it possible to analyze situations with heterogeneous and interacting economic agents. Depending on the actions of the economic agents, the economic environment changes from one period to another. We focus on stationary equilibrium, the simplest form of behavior that is consistent with rationality. Since the number of stationary equilibria abound, we present the stochastic tracing procedure, a method to select equilibria. Since stationary equilibria are difficult to characterize analytically, we also present a numerical algorithm by which they can be computed. The algorithm is constructed in such a way that the equilibrium selected by the stochastic tracing procedure is computed. We illustrate the usefulness of this approach by showing how it leads to new insights in the theory of dynamic oligopoly.
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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number
029.