The Linear Programming Approach to Solving Large Scale Dynamic Stochastic Games∗

In this paper we introduce a new method to approximate Markov perfect equilibrium in large scale dynamic stochastic games that are not amenable to exact solution due to the curse of dimensionality. The method is based on an algorithm that iterates an approximate best response operator computed via the ‘approximate linear programming’ approach. We provide results that lend theoretical support to our approximation. We test our method on a class of dynamic models of imperfect competition. Our results suggest that the approach we propose significantly expands the set of models that can be analyzed computationally. This substantially enhances the applicability of dynamic oligopoly models among other applications of dynamic stochastic games.