A Kalman-Jacobi hybrid model for game theory: a fuzzy logic approach to financial market competition

PurposeThis research examines the structure of financial markets by integrating game theory and fuzzy logic. The objective is to develop a differential game model that analyzes competition among financial firms within a specific industry.Design/methodology/approachThis study employs a differential game model, where players set service prices, dynamically influencing market shares and profits over time. The model incorporates two fuzzy criteria—market power (price-variable cost ratio) and product differentiation (Herfindahl-Hirschman index)—to assess market structure. These criteria are applied to data from Tehran Stock Exchange (TSE) industries, specifically banking, insurance, and e-commerce, to evaluate their respective market structures.FindingsThe results indicate that financial industries tend to be closer to perfect competition compared to other market structures. Additionally, a comparative analysis of the status of these industries in relation to each other reveals that the banking and the e-commerce industries exhibit characteristics of monopolistic competition, whereas the insurance industry aligns more closely with perfect competition. This study provides useful insights into player behavior and its implications for financial policy, aiding in market analysis and forecasting.Originality/valueThis research offers a novel approach by integrating game theory and fuzzy logic to analyze the structure of financial markets.