The micro–macro policy game under uncertainty and risk attitude

A two-firm oligopoly model under uncertainty and risk attitude is developed to explore the effect of asymmetric and symmetric probability responses by the firms to a change in their perception of their business climate, as a result of a change in government policy. A change in the Environmental Protection Agency's clean air policy is used as an example. The focus is on oligopoly vendor firms supplying clean air equipment. The analysis is in the context of game theory. The government's goal is to increase net social welfare by a given policy change. It is shown among other results that the likelihood of a positive response on the part of the firms will depend essentially on the degree of oligopoly interaction (or competition). Also, since the government lacks ex ante knowledge about how firms will perceive a policy change, it is shown that it may be difficult for the government to act as an ex ante optimizer in the usual way. The conclusion contains suggestions on information sharing and industry concentration, among others.