Computing Equilibria of Dynamic Games

Yongyang Cai (), Yongyang Cai () and Kenneth Judd
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Yongyang Cai: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Yongyang Cai: Becker Friedman Institute, University of Chicago, Chicago, Illinois 60637; Hoover Institution, Stanford University, Stanford, California 94305; Department of Agricultural, Environment and Development Economics, The Ohio State University, Columbus, Ohio 43210
Authors registered in the RePEc Author Service: Yongyang Cai

Operations Research, 2017, vol. 65, issue 2, 337-356

Abstract: We develop a numerical method for computing all pure strategy subgame-perfect equilibrium values of dynamic strategic games with discrete states and actions. We define a monotone mapping that eliminates dominated strategies, and when applied iteratively, delivers an accurate approximation to the true equilibrium payoffs of the underlying game. Our algorithm has three parts. The first provides an outer approximation to equilibrium values, constructed so that any value outside of this approximation is not an equilibrium value. The second provides an inner approximation; any value contained within this approximation is an equilibrium value. Together, the two approximations deliver a practical check of approximation accuracy. The third part of our algorithm delivers sample equilibrium paths. To illustrate our method, we apply it to a dynamic oligopoly competition with endogenous production capacity.

Keywords: dynamic games; multiple equilibria; dynamic oligopoly; computation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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