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Computational Optimization and Applications

, Volume 62, Issue 2, pp 477–515 | Cite as

Finite purchasing power and computations of Bertrand–Nash equilibrium prices

  • W. Ross Morrow
Article

Abstract

This article considers the computation of Bertrand–Nash equilibrium prices when the consumer population has finite purchasing power. The literal KKT conditions for equilibria contain “spurious” solutions that are not equilibria but can be computed by existing software, even with prominent regularization strategies for ill-posed problems. We prove a reformulated complementarity problem based on a fixed-point representation of equilibrium prices improves computational reliability and provide computational evidence of its efficiency on an empirically-relevant problem. Scientific inferences from empirical Bertrand competition models with explicit limits on individual purchasing power will benefit significantly from our proposed methods for computing equilibrium prices. An analysis of floating-point computations also implies that any model will have finite purchasing power when implemented on existing computing machines, and thus the techniques discussed here have general value. We discuss a heuristic to identify, and potentially mitigate, the impact of computationally-imposed finite purchasing power on computations of equilibrium prices in any model.

Keywords

Bertrand–Nash equilibrium prices Mixed complementarity problems Ill-posed problems Finite purchasing power Mixed logit models 

Notes

Acknowledgments

This research was primarily undertaken at Iowa State University, with its support. The author would like to acknowledge helpful comments made by several reviewers, Todd Munson for assistance with the PATH software, and Uday Shanbhag for suggesting Tikhonov regularization. Several anonymous reviewers provided very helpful feedback that shaped the results and presentation.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Ford Research and Innovation Center, Palo AltoPalo AltoUSA

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