Testing Threats in Repeated Games

I introduce a solution concept for infinite-horizon games, called “Nash equilibrium with added tests”, in which players optimize with respect to relevant threats only after having tested them before. Both the optimal response and the tests are part of equilibrium behavior. The concept is applied to repeated 2×2 games and yields the following results: 1) Sustained cooperation in games such as the Prisoner’s Dilemma is preceded by a “build up” phase, whose comparative statics are characterized. 2) Sustainability of long-run cooperation by means of familiar selfenforcement conventions varies with the payoff structure. E.g., “constructive reciprocity” achieves cooperation with minimal buildup time in the Prisoner’s Dilemma, yet it is inconsistent with long-run cooperation in Chicken. 3) Nevertheless, a “folk theorem” holds for this class of games.Game Theory, Prisoner's Dilemma

Bottom-up design of strategic options as finite automata.

In this paper we look at the problem of strategic decision making. We start by presenting a new formalisation of strategic options as finite automata. Then, we show that these finite automata can be used to develop complex models of interacting options, such as option combinations and product options. Finally, we analyse real option games, presenting an algorithm to generate option games (based on automata)

Thinking categorically about others: A conjectural equilibrium approach

Inspired by the social psychology literature, we study the implications of categorical thinking on decision making in the context of a large normal form game. Every agent has a categorization (partition) of her opponents and can only observe the average behavior in each category. A strategy profile is a Conjectural Categorical Equilibrium (CCE) with respect to a given categorization profile if every player's strategy is a best response to some consistent conjecture about the strategies of her opponents. We show that, for a wide family of games and for a particular categorization profile, every CCE becomes almost Nash as the number of players grows. An equivalence of CCE and Nash equilibrium is achieved in the settings of a non-atomic game. This highlights the advantage of categorization as a simplifying mechanism in complex environments. With much less information in their hands agents behave as if they see the full picture. Some properties of CCE when players categorize `non-optimally' are also considered

Simulation of electricity markets using agent-based computational learning

The purpose of this research is to conduct an analysis of how agent-based computational learning may contribute to a better understanding of pricing policies and strategic management of plant portfolio in electricity markets. The contributions of this thesis are methodological and theoretical with applications in policy analysis for electricity markets. At a policy level, this thesis applies agent-based simulation to the analysis of the impact of market design on the players' strategies and on the industry's performance as a whole. This represents the first detailed study of the New Electricity Trading Arrangements (NETA) in the England and Wales (E&W) electricity market, giving insights into the implications of NETA before its introduction. Further, this thesis addresses the issue of dominant position abuse by individual players in electricity markets. The context is a real application to the E&W electricity market as part of a Competition Commission Inquiry. The research contributions are in the areas of both market power and market design policy issues. At a methodological level, this thesis presents two contributions: the Finite Automata Dynamic Game (FADG) and the Plant Trading Game. The FADG models learning and adaptation in N-player extensive form games of incomplete information, where co-evolutionary automata learn and adapt together. The plant trading game is a large coordination game, simulating how players optimally learn and adapt in order to trade electricity plants. At a theoretical level, this thesis presents three contributions. First, it develops a stylised model for conduct-evaluation in electricity markets, which is applied to the analysis of market power abuse and regulatory policy. Second, it studies plant trading within the context of a Cournot game. Third, it shows that, in an FADG, best response is a necessary but not a sufficient condition for rational behaviour