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Modeling Implicit Collusion Using Coevolution

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
e.anderson{at}econ.usyd.edu.au
caut{at}agsm.edu.au

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.

Subject classifications: noncooperative games; repeated games; implicit collusion; genetic algorithm; energy; electricity markets.
History: Received January 2005; revision received January 2008; accepted April 2008.