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Equilibrium modeling and solution approaches inspired by nonconvex bilevel programming

Author

Listed:
  • Stuart Harwood

    (ExxonMobil Corporate Strategic Research)

  • Francisco Trespalacios

    (ExxonMobil Upstream Research Company)

  • Dimitri Papageorgiou

    (ExxonMobil Corporate Strategic Research)

  • Kevin Furman

    (ExxonMobil Upstream Research Company)

Abstract

Methods for finding pure Nash equilibria have been dominated by variational inequalities and complementarity problems. Since these approaches fundamentally rely on the sufficiency of first-order optimality conditions for the players’ decision problems, they only apply as heuristic methods when the players are modeled by nonconvex optimization problems. In contrast, this work approaches Nash equilibrium using theory and methods for the global optimization of nonconvex bilevel programs. Through this perspective, we draw precise connections between Nash equilibria, feasibility for bilevel programming, the Nikaido–Isoda function, and classic arguments involving Lagrangian duality and spatial price equilibrium. Significantly, this is all in a general setting without the assumption of convexity. Along the way, we introduce the idea of minimum disequilibrium as a solution concept that reduces to traditional equilibrium when an equilibrium exists. The connections with bilevel programming and related semi-infinite programming permit us to adapt global optimization methods for those classes of problems, such as constraint generation or cutting plane methods, to the problem of finding a minimum disequilibrium solution. We propose a specific algorithm and show that this method can find a pure Nash equilibrium even when the players are modeled by mixed-integer programs. Our computational examples include practical applications like unit commitment in electricity markets.

Suggested Citation

  • Stuart Harwood & Francisco Trespalacios & Dimitri Papageorgiou & Kevin Furman, 2024. "Equilibrium modeling and solution approaches inspired by nonconvex bilevel programming," Computational Optimization and Applications, Springer, vol. 87(2), pages 641-676, March.
  • Handle: RePEc:spr:coopap:v:87:y:2024:i:2:d:10.1007_s10589-023-00524-w
    DOI: 10.1007/s10589-023-00524-w
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    References listed on IDEAS

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