2010/01/20 by Michael Ludkovski, Ludkovski, Michael
Economics, Econometrics and Finance · Mathematics · #60G40 #91A15 #91B76 #93E20 #FOS: Economics and business #FOS: Mathematics #Optimization and Control (math.OC) #Probability (math.PR) #Trading and Market Microstructure (q-fin.TR) #math.OC #math.PR #msc:60G40 #msc:91A15 #msc:91B76 #msc:93E20 #q-fin.TR
paper · pdf · doi:10.48550/arxiv.1001.3455
Revised version, 24 pages
arxiv created 2010/08/21 · arxiv updated 2010/08/24
We study optimal behavior of energy producers under a CO2 emission abatement program. We focus on a two-player discrete-time model where each producer is sequentially optimizing her emission and production schedules. The game-theoretic aspect is captured through a reduced-form price-impact model for the CO2 allowance price. Such duopolistic competition results in a new type of a non-zero-sum stochastic switching game on finite horizon. Existence of game Nash equilibria is established through generalization to randomized switching strategies. No uniqueness is possible and we therefore consider a variety of correlated equilibrium mechanisms. We prove existence of correlated equilibrium points in switching games and give a recursive description of equilibrium game values. A simulation-based algorithm to solve for the game values is constructed and a numerical example is presented.