AbstractThis paper studies a controlled backward-forward linear-quadratic-Gaussian (LQG) large population system in Stackelberg games. The leader agent is of backward state and follower agents are of forward state. The leader agent is dominating as its state enters those of follower agents. On the other hand, the state-average of all follower agents affects the cost functional of the leader agent. In reality, the leader and the followers may represent two typical types of participants involved in market price formation: the supplier and producers. This differs from standard MFG literature and is mainly due to the Stackelberg structure here. By variational analysis, the consistency condition system can be represented by some fully-coupled backward-forward stochastic differential equations (BFSDEs) with high dimensional block structure in an open-loop sense. Next, we discuss the well-posedness of such a BFSDE system by virtue of the contraction mapping method. Consequently, we obtain the decentralized strategies for the leader and follower agents which are proved to satisfy the ε-Nash equilibrium property.
Backward-forward linear-quadratic mean-field Stackelberg games
