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

Ingmar Vierhaus, Roel van Veldhuizen and Armin Fügenschuh

Discrete Dynamics in Nature and Society, 2017, vol. 2017, 1-8

Abstract:

Existing models of nonrenewable resources assume that sophisticated agents compete with other sophisticated agents. This study instead uses a level- 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- players best respond to the action of player . 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.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:2768045

DOI: 10.1155/2017/2768045

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