A Mean-Field Game Approach to Price Formation

Abstract

Here, we introduce a price formation model where a large number of small players can store and trade a commodity such as electricity. Our model is a constrained mean-field game (MFG) where the price is a Lagrange multiplier for the supply versus demand balance condition. We establish the existence of a unique solution using a fixed-point argument. In particular, we show that the price is well defined, and it is a Lipschitz function of time. Then, we study linear-quadratic models that can be solved explicitly and compare our model with real data.