Dynamic Cournot Models for Production of Exhaustible Commodities Under Stochastic Demand

20 Pages Posted: 21 Mar 2014

See all articles by Michael Ludkovski

Michael Ludkovski

University of California, Santa Barbara

Xuwei Yang

University of California, Santa Barbara (UCSB)

Date Written: February 21, 2014

Abstract

We extend the dynamic Cournot model of Ludkovski and Sircar (2012) by considering stochastic demand. We analyze a duopoly between an exhaustible producer and a "green" competitor. Both producers dynamically make decisions regarding their production rates; in addition the exhaustible producer optimizes search for new reserves. The aggregate price earned by the producers switches between high and low demand regimes with exogenously given holding rates. We study how the regime changes and the amount of competition affect game equilibria, and compare with the case of deterministic demand. A novel feature driven by stochasticity of demand is that production may shut down during low demand to conserve reserves.

Keywords: Cournot games, exploration control, stochastic demand, stochastic differential games, exhaustible resources

Suggested Citation

Ludkovski, Mike and Yang, Xuwei, Dynamic Cournot Models for Production of Exhaustible Commodities Under Stochastic Demand (February 21, 2014). Available at SSRN: https://ssrn.com/abstract=2412412 or http://dx.doi.org/10.2139/ssrn.2412412

Mike Ludkovski (Contact Author)

University of California, Santa Barbara ( email )

Santa Barbara, CA 93106
United States

HOME PAGE: http://www.pstat.ucsb.edu/faculty/ludkovski

Xuwei Yang

University of California, Santa Barbara (UCSB) ( email )

Santa Barbara, CA 93106
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
95
rank
263,020
Abstract Views
442
PlumX Metrics