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Strategic Uncertainty in Markets for Nonrenewable Resources: A Level-k Approach

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  • Vierhaus, Ingmar
  • van Veldhuizen, Roel
  • Fügenschuh, Armin

Abstract

Existing models of nonrenewable resources assume that sophisticated agents compete with other sophisticated agents. This study instead uses a level-k approach to examine cases where the focal agent is uncertain about the strategy of his opponent or predicts that the opponent will act in a nonsophisticated manner. Level-0 players are randomized uniformly across all possible actions, and level-k players best respond to the action of player k - 1. We study a dynamic nonrenewable resource game with a large number of actions. We are able to solve for the level-1 strategy by reducing the averaging problem to an optimization problem against a single action. We show that lower levels of strategic reasoning are close to the Walras and collusive benchmark, whereas higher level strategies converge to the Nash-Hotelling equilibrium. These results are then fitted to experimental data, suggesting that the level of sophistication of participants increased over the course of the experiment.

Suggested Citation

  • Vierhaus, Ingmar & van Veldhuizen, Roel & Fügenschuh, Armin, 2017. "Strategic Uncertainty in Markets for Nonrenewable Resources: A Level-k Approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-8.
    • Handle: RePEc:zbw:espost:209694
    DOI: 10.1155/2017/2768045
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