Modeling Implicit Collusion Using Coevolution

Authors:
E. J. Anderson;T. D. H. Cau
Affiliations:
Faculty of Economics and Business, University of Sydney, Sydney, New South Wales 2006, Australia;Australian School of Business, University of New South Wales, Sydney, New South Wales 2052, Australia
Venue:
Operations Research
Year:
2009

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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.