The ‘how much’ war. A numerical method to solve duopolistic differential game in a closed-loop equilibrium Advisors: Benjamín Ivorra, Ángel M. Ramos (*)MsC Thesis. Mathematical Engineering UCM, Facultad de Matemáticas. Madrid 27-09-2012 1 Jorge Herrera de la Cruz (*)
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The ‘how much’ war.A numerical method to solve
a duopolistic differential game in a closed-loop equilibrium
Advisors: Benjamín Ivorra, Ángel M. Ramos
(*)MsC Thesis. Mathematical EngineeringUCM, Facultad de Matemáticas. Madrid
27-09-2012
Jorge Herrera de la Cruz (*)
Microsoft
Modificar en todo el texto y poner Advisors
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General Idea
Jorge Herrera de la CruzAdvisors: Benjamín Ivorra, Ángel M. Ramos
The “how much” war:Marketing departments have to decide how much they invest
in advertising to maximize sales. Also, they have to set a price. Both variables are relevant key drivers on sales.
A duopolistic differential game:Usually, companies are in a competitive world (generally
oligopolistic or duopolistic). We need a theoretical framework in order to incorporate this behaviour to study the optimal decision
A numerical method:Differential games are hard to solve analytically, so we have
to rely on numerical solutions as the ones presented here.
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Motivation I
12.000 M. € advertising expenditurein Spain in 2011(Infoadex)
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1181716
10 7
% investment
TV
cinema
Newspapers
tabloids
Ext
Internet
Radio
Magazines
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Advisors: Benjamín Ivorra, Ángel M. Ramos
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Motivation II
Most of these investors are in an oligopolistic or duopolistic framework
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Advisors: Benjamín Ivorra, Ángel M. Ramos
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Motivation III
These methods should deal with the following idea: “all competitors in the market are rational”
We believe that it is important to develop methods to optimize their expenses.
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Some relevant questions
…in a competitive environment?
How much to spend in advertising per week in a fixed period of time…
What should be our weekly price…
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Objectives
Introduce a theoretical method in a differential game form toanswer previous key questions
Estimate parameter values for this theoretical model
Develope a numerical method inspired fromdynamic programming methods to solve the game
Present the results of the game, and compare them with real data.
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Novel contributions
1 We use LOTKA VOLTERRA models of species competition in a
Differential Marketing Game.
We present an algorithm to solve Closed-loop equilibrium adapted from dynamic programming literature.
The literature uses Lanchaster-war models as benchmark
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The literature in differential games usually obtains analytic Closed-loop equilibrium from simple models or obtains Open-loop equilibrium
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Theoretical Model
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Theoretical Model (I): a differential game
St :
�̇� 𝒊= 𝒇 (𝒙 𝒊 ,𝒙 𝒋 ,𝒑𝒊 ,𝒖𝒊 ,𝒖 𝒋 ) 𝒙 𝒊 (𝟎 )=𝒙𝒊 ,𝟎
There are 2 players (i=1,2)
Each player try to maximize Ji with respect to control variables (p,u)
The functional is a dynamic discounted benefit function:Discounting factor r, Price p, sales x and C(u) is a cost function.
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Advisors: Benjamín Ivorra, Ángel M. Ramos
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Theoretical Model (II)
St : The players coexist in a dynamical system that reflects the relationship among :
-State variables: sales [x] -Controls: advertising [u] and price [p]
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Advisors: Benjamín Ivorra, Ángel M. Ramos
�̇� 𝒊= 𝒇 (𝒙 𝒊 , 𝒙 𝒋 ,𝒑𝒊 ,𝒖𝒊 ,𝒖 𝒋)I maximize and I know you do it
I maximize and I know you do it
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Solving the model
This model is a differential game. We can compute two equilibrium (solutions):
Open-loop
Optimal Controls are functions of time
Ui*=Ui(t), pi*=Pi(t)
Closed-loopOptimal Controls are functions of time and state variables
Ui*=Ui(t,xi(t)), pi*=Pi(t, xi(t))
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Advisors: Benjamín Ivorra, Ángel M. Ramos
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NASH EQUILIBRIUM
TIME CONSISTENCE
Properties of equilibrium
Open-loop
Closed-loop
SUBGAME PERFECTNESS
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Parameter estimation
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Which parameters to estimate?
St :
�̇� 𝒊= 𝒇 (𝒙 𝒊 , 𝒙 𝒋 ,𝒑𝒊 ,𝒖𝒊 ,𝒖 𝒋)
We have to estimate parameters for the Cost function and the market dynamic system
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Our data set:
Data set from a well-known company in Spain is available.
This company competes with a withe label.
Our company needs to maximize:
The competitor only needs to maximize:
pricei advertisingi
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Advisors: Benjamín Ivorra, Ángel M. Ramos
pricei
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Market Dynamic System
�̇�=𝝆𝟏√𝒗𝟏 (𝟏−𝐌 )− 𝝆𝟐√𝒗𝟐𝑴
�̇� 𝒊=𝝆 𝒊𝒗𝒊√ (𝑵𝟏+𝑵𝟐−𝒙 𝒊− 𝒙 𝒋 ) 𝑫 𝒊(𝒑𝒊)
�̇� 𝒊=[𝜶𝟏(𝟏− 𝜶𝟏 𝒙 𝒊
𝑵 𝒊)− 𝜷 𝒊𝒋 𝒙 𝒋 ]𝒙𝒊
LANCHESTER Model of COMBAT
LOTKA-VOLTERRA
Species competition
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Advisors: Benjamín Ivorra, Ángel M. Ramos
�̇� 𝒊= 𝒇 (𝒙 𝒊 , 𝒙 𝒋 ,𝒑𝒊 ,𝒖𝒊 ,𝒖 𝒋)
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Discrete time LOTKA VOLTERRA models WITH EXOGENOUS INPUTS
LV-1 LV-2 VARX
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�̇� 𝒊=[𝜶𝟏(𝟏− 𝜶𝟏 𝒙 𝒊
𝑵 𝒊)− 𝜷 𝒊𝒋 𝒙 𝒋+…+𝜺𝒊]𝒙 𝒊
- price and advertising in a multiplicative way.
- a multiplicative error term.
-LV-1 and price and advertising in a quadratic way.
- a multiplicative error term.
-Is a linearized version of LV-1
Jorge Herrera de la CruzAdvisors: Benjamín Ivorra, Ángel M. Ramos
1 • Let G a 2D grid with x1 and x2, define dx1,dx2 and h• Initialize control vectors to 0, =0
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• Startwith a guessestimateforVih and calculateitsgradient (gradVi)
• Actualize x1 and x2 accordingto• VALUE ITERATION (subroutine). Takingfixed, iterate in HJB
tillconvergence. Use interpolation
• POLICY ITERATION (subroutine). Taking Vihfixed, explicitly obtain a new iterating in HJB till convergence.
• Reiterate VALUE and POLICY till tolerance criteria is achieved.
Jorge Herrera de la CruzAdvisors: Benjamín Ivorra, Ángel M. Ramos
Microsoft
es SUBROUTINE te falta la O
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Dynamic Programming (II)
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• We have run numerical experiments to validate our algorithm:
• We have solved a 1D model with an explicit solution [Brock-Mirman]
• We have also solved a 2D benchmark model, found in the literature, without any explicit solution, but we have obtained similar results to the published ones.
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The ‘how much’ war. Numerical Solution
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Our solution
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Competitor
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We could have won a 7% more
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Conclusions and Future Research
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Conclusions and Future Research
We have shown a differential game algorithm in a closed-loop equilibrium to solve a duopolistic problem with real world data:
In our experiment, we show that we could have won a 7% more than with the adopted strategy.
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In future works, we propose:1. Study Stackelberg equilibrium (leader-follower)2. Study Stochastic Games taking into account estimatedvalues of error sizes with statistical methods3. Incorporate richer lag schemes in dynamical systemas suggested by statistical tests.
Jorge Herrera de la CruzAdvisors: Benjamín Ivorra, Ángel M. Ramos