Beyond Myopic Best Response (in Cournot Competition)

15^th November 2011, 16:00 ALT
Prof. Elias Koutsoupias
Department of Computer Science
University of Athens
Greece

Abstract

A Nash Equilibrium is a joint strategy profile at which each agent myopically plays a best response to the other agents' strategies, ignoring the possibility that deviating from the equilibrium could lead to an avalanche of successive changes by other agents. However, such changes could potentially be beneficial to the agent, creating incentive to act non-myopically, so as to take advantage of others' responses.

To study this phenomenon, we consider a non-myopic Cournot competition, where each firm selects whether it wants to maximize profit (as in the classical Cournot competition) or to maximize revenue (by masquerading as a firm with zero production costs).

We study the properties of Nash Equilibria of non-myopic Cournot competition with linear demand functions and show existence of pure Nash Equilibria, that simple best response dynamics will produce such an equilibrium, and that for some natural dynamics this convergence is within linear time. This is in contrast to the well known fact that best response dynamics need not converge in the standard myopic Cournot competition.

Furthermore, we compare the outcome of the non-myopic Cournot competition with that of the standard myopic Cournot competition. Not surprisingly, perhaps, prices in the non-myopic game are lower and the firms, in total, produce more and have a lower aggregate utility.