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A Tutorial on Building Policy Models as Mixed-Complementarity Problems

Author

Listed:
  • Frederic Murphy

    (King Abdullah Petroleum Studies and Research Center, Riyadh, Saudi Arabia; and Fox School of Business, Temple University, Philadelphia, Pennsylvania 19103)

  • Axel Pierru

    (King Abdullah Petroleum Studies and Research Center, Riyadh, Saudi Arabia)

  • Yves Smeers

    (King Abdullah Petroleum Studies and Research Center, Riyadh, Saudi Arabia; and Center for Operations Research and Econometrics (CORE), Université Catholique de Louvain, Louvain la Neuve, Belgium B-1348)

Abstract

After 50 years of development, building and solving mixed-complementarity problems (MCPs) have become commonplace for policy models that analyze markets. These models are used to develop policies that reshape markets, or introduce markets that replace other organizational forms. In this tutorial, we give some background on building economic equilibrium models, starting with the use of linear programming, and show how MCPs can be used to answer policy questions that require manipulation of the solutions to linear programs of economic sectors. We illustrate the use of MCPs using examples from King Abdullah Petroleum Studies and Research Center projects, including a model of domestic energy markets in Saudi Arabia, which is in the process of changing some of its pricing policies and market regulations.

Suggested Citation

  • Frederic Murphy & Axel Pierru & Yves Smeers, 2016. "A Tutorial on Building Policy Models as Mixed-Complementarity Problems," Interfaces, INFORMS, vol. 46(6), pages 465-481, December.
    • Handle: RePEc:inm:orinte:v:46:y:2016:i:6:p:465-481
    DOI: 10.1287/inte.2016.0842
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