scholarly journals Price-based regulation of oligopolistic markets under discrete choice models of demand

2021 ◽  
Author(s):  
Stefano Bortolomiol ◽  
Virginie Lurkin ◽  
Michel Bierlaire

AbstractWe propose a framework to find optimal price-based policies to regulate markets characterized by oligopolistic competition and in which consumers make a discrete choice among a finite set of alternatives. The framework accommodates general discrete choice models available in the literature in order to capture heterogeneous consumer behavior. In our work, consumers are utility maximizers and are modeled according to random utility theory. Suppliers are modeled as profit maximizers, according to the traditional microeconomic treatment. Market competition is modeled as a non-cooperative game, for which an approximate equilibrium solution is sought. Finally, the regulator can affect the behavior of all other agents by giving subsidies or imposing taxes to consumers. In transport markets, economic instruments might target specific alternatives, to reduce externalities such as congestion or emissions, or specific segments of the population, to achieve social welfare objectives. In public policy, different agents have different individual or social objectives, possibly conflicting, which must be taken into account within a social welfare function. We present a mixed integer optimization model to find optimal policies subject to supplier profit maximization and consumer utility maximization constraints. Then, we propose a model-based heuristic approach based on the fixed-point iteration algorithm that finds an approximate equilibrium solution for the market. Numerical experiments on an intercity travel case study show how the regulator can optimize its decisions under different scenarios.

2021 ◽  
Vol 55 (5) ◽  
pp. 1025-1045
Author(s):  
Stefano Bortolomiol ◽  
Virginie Lurkin ◽  
Michel Bierlaire

Oligopolistic competition occurs in various transportation markets. In this paper, we introduce a framework to find approximate equilibrium solutions of oligopolistic markets in which demand is modeled at the disaggregate level using discrete choice models, according to random utility theory. Compared with aggregate demand models, the added value of discrete choice models is the possibility to account for more complex and precise representations of individual behaviors. Because of the form of the resulting demand functions, there is no guarantee that an equilibrium solution for the given market exists, nor is it possible to rely on derivative-based methods to find one. Therefore, we propose a model-based algorithmic approach to find approximate equilibria, which is structured as follows. A heuristic reduction of the search space is initially performed. Then, a subgame equilibrium problem is solved using a mixed integer optimization model inspired by the fixed-point iteration algorithm. The optimal solution of the subgame is compared against the best responses of all suppliers over the strategy sets of the original game. Best response strategies are added to the restricted problem until all ε-equilibrium conditions are satisfied simultaneously. Numerical experiments show that our methodology can approximate the results of an exact method that finds a pure equilibrium in the case of a multinomial logit model of demand with a single-product offer and homogeneous demand. Furthermore, it succeeds at finding approximate equilibria for two transportation case studies featuring more complex discrete choice models, heterogeneous demand, a multiproduct offer by suppliers, and price differentiation for which no analytical approach exists.


2018 ◽  
Vol 1 (1) ◽  
pp. 21-37
Author(s):  
Bharat P. Bhatta

This paper analyzes and synthesizes the fundamentals of discrete choice models. This paper alsodiscusses the basic concept and theory underlying the econometrics of discrete choice, specific choicemodels, estimation method, model building and tests, and applications of discrete choice models. Thiswork highlights the relationship between economic theory and discrete choice models: how economictheory contributes to choice modeling and vice versa. Keywords: Discrete choice models; Random utility maximization; Decision makers; Utility function;Model formulation


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