A Linear Quadratic Partially Observed Stackelberg Stochastic Differential Game with Applications

TL;DR

This paper develops a comprehensive framework for solving linear-quadratic partially observed Stackelberg stochastic differential games, deriving explicit equilibrium strategies and applying them to a dynamic advertising problem with asymmetric information.

Contribution

It introduces new necessary and sufficient conditions for Stackelberg equilibrium, including explicit solutions and Riccati equations, under partial observation and non-convex control constraints.

Findings

Explicit equilibrium strategies derived for the game.

Application to a dynamic advertising problem demonstrating practical relevance.

Numerical simulations validate the theoretical results.

Abstract

This paper is concerned with a linear-quadratic partially observed Stackelberg stochastic differential game with correlated state and observation noises, where the diffusion coefficient does not contain the control variable and the control set is not necessarily convex. Both the leader and the follower have their own observation equations, and the information filtration available to the leader is contained in that to the follower. By spike variational, state decomposition and backward separation techniques, necessary and sufficient conditions of the Stackelberg equilibrium points are derived. In the follower's problem, the state estimation feedback of optimal control can be represented by a forward-backward stochastic differential filtering equation and some Riccati equation. In the leader's problem, via the innovation process, the state estimation feedback of optimal control is represented by a stochastic differential filtering equation, a semi-martingale process and three high-dimensional Riccati equations. At the same time, the uniqueness and existence of solutions to adjoint equations can be guaranteed by a new combined idea, and a kind of fully coupled forward-backward stochastic differential equations with filtering is studied as a by-product. Then we give explicit expressions of Stackelberg equilibrium points in a special case. As a practical application, an inspiring dynamic advertising problem with asymmetric information is studied, and the effectiveness and reasonability of the theoretical result is illustrated by numerical simulations. Moreover, the relationship between optimal control, state estimate and some practical parameters is analyzed in detail.