Modeling Entropy in Duopolistic Competition: A Game Theory Approach

Abstract: This paper introduces a theoretical model to incorporate deviation in rational behaviour of players in the form of increased uncertainty. This uncertainty is modeled as entropy of information in the model and the model is validated using a Duopolistic Competition scenario. It is observed that players are ready to forego a portion of their payoff as long as the opponent is facing equal or more losses owing to the increased uncertainty in the game. The paper uses a Quadratic Programing approach to obtain the optimized results of the theoretical model.

Keywords: Game Theory, Rationality, Entropy, Information, Duopolistic Competition

JEL Classification Number: C72 D01 D43 D81