Modeling Implicit Collusion Using Coevolution

E. J. Anderson () and T. D. H. Cau ()
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E. J. Anderson: Faculty of Economics and Business, University of Sydney, Sydney, New South Wales 2006, Australia
T. D. H. Cau: Australian School of Business, University of New South Wales, Sydney, New South Wales 2052, Australia

Operations Research, 2009, vol. 57, issue 2, 439-455

Abstract: Many oligopolies operate as a repeated game. In such circumstances, it can be expected that profit-maximising participants may engage in implicit collusion to profitably increase spot market prices. This paper models the emergence of such implicit collusion in a stylised market model using a coevolutionary approach. Players bid supply functions made up of a finite number of linear pieces. Each player uses a genetic algorithm to find state-based strategies depending on the price and demand in the last period and the predicted demand in the next period. We consider a symmetric duopoly and demonstrate that collusive behaviour can be learned even when there is very limited information available to the participants. Moreover, we show a type of implicit collusive behaviour that occurs even though the system does not settle into a stable equilibrium. We use a wholesale electricity market, in which supply function bids are typical, as a motivating example throughout this paper.

Keywords: noncooperative games; repeated games; implicit collusion; genetic algorithm; energy; electricity markets (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:57:y:2009:i:2:p:439-455

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