Environmental Stochasticity, Cournot Competition and the Prisoner's Dilemma

Robert Mamada, Charles Perrings

Research output: Contribution to journalArticle

Abstract

The production of natural resource-based commodities is frequently affected by environmental uncertainty and the strategic response of producers to uncertainty. We ask when uncertainty induces cooperation. Using a model of Cournot competition under environmentally induced price uncertainty, we consider the conditions under which cooperation is favored over defection. We find that the probability of cooperation depends on the length of the time period over which production levels are adjusted to price shocks. When uncertainty is low, the probability of cooperation is monotonically increasing in the length of this adjustment period. When uncertainty is high, the probability of cooperation initially increases as the adjustment period lengthens, but beyond some threshold starts to fall. In this case, the expected outcome is defection. We consider the broader implications of these findings.

Original languageEnglish (US)
JournalInternational Game Theory Review
DOIs
StateAccepted/In press - Jan 1 2019

Keywords

  • Cournot competition
  • Itô's lemma
  • price stochasticity
  • Wiener process

ASJC Scopus subject areas

  • Computer Science(all)
  • Business and International Management
  • Statistics, Probability and Uncertainty

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