Environmental Stochasticity, Cournot Competition and the Prisoner’s Dilemma

Robert Mamada and Charles Perrings
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Robert Mamada: College of Humanities and Social Sciences, Grand Canyon University, Phoenix, AZ 85017, USA
Charles Perrings: School of Life Sciences, Arizona State University, Tempe, AZ 85281, USA

International Game Theory Review (IGTR), 2020, vol. 22, issue 01, 1-11

Abstract: The production of natural resource-based commodities is frequently affected by environmental uncertainty and the strategic response of producers to uncertainty. We ask when uncertainty induces cooperation. Using a model of Cournot competition under environmentally induced price uncertainty, we consider the conditions under which cooperation is favored over defection. We find that the probability of cooperation depends on the length of the time period over which production levels are adjusted to price shocks. When uncertainty is low, the probability of cooperation is monotonically increasing in the length of this adjustment period. When uncertainty is high, the probability of cooperation initially increases as the adjustment period lengthens, but beyond some threshold starts to fall. In this case, the expected outcome is defection. We consider the broader implications of these findings.

Keywords: Cournot competition; price stochasticity; Itô’s lemma; Wiener process (search for similar items in EconPapers)
JEL-codes: C72 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S0219198919500099

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