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Insisting on a Non-negative Price: Oligopoly, Uncertainty, Welfare and Multiple Equilibria

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  • Lagerlöf, Johan N.M.

Abstract

I study Cournot competition under incomplete information about demand while assuming that market price must be non-negative for all demand realizations. Although this assumption is very natural, it has only rarely been made in the earlier literature. Yet it has important economic consequences: (1) multiple (symmetric, pure strategy) equilibria can exist, despite the fact that demand and cost are linear; and (2) expected total surplus can be larger when the firms do not know demand than when they do, a result which has important implications for the social desirability of information sharing. The arguments of the paper are relevant also for price competition and for uncertainty about, e.g., cost or the number of firms, and these issues are discussed.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3901.

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Date of creation: May 2003
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Handle: RePEc:cpr:ceprdp:3901

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Keywords: antitrust policy; information sharing; multiple equilibria; non-negativity constraint; trade associations; value of information;

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References

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  1. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  2. Rabah Amir, 2000. "On the Effects of Entry in Cournot Markets," Econometric Society World Congress 2000 Contributed Papers 1475, Econometric Society.
  3. Basar, Tamer & Ho, Yu-Chi, 1974. "Informational properties of the Nash solutions of two stochastic nonzero-sum games," Journal of Economic Theory, Elsevier, vol. 7(4), pages 370-387, April.
  4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  5. Kai-Uwe Kühn, 2001. "Fighting collusion by regulating communication between firms," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 167-204, 04.
  6. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
  7. Malueg, David A & Tsutsui, Shunichi O, 1998. "Oligopoly Information Exchange When Non-negative Price and Output Constraints May Bind," Australian Economic Papers, Wiley Blackwell, vol. 37(4), pages 363-71, December.
  8. Malueg, David A. & Tsutsui, Shunichi O., 1998. "Distributional assumptions in the theory of oligopoly information exchange1," International Journal of Industrial Organization, Elsevier, vol. 16(6), pages 785-797, November.
  9. Lode Li, 1985. "Cournot Oligopoly with Information Sharing," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 521-536, Winter.
  10. AMIR, Rabah, 1994. "Cournot Oligopoly and the Theory of Supermodular Games," CORE Discussion Papers 1994013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Jean-Pierre Ponssard, 1979. "The Strategic Role of Information on the Demand Function in an Oligopolistic Market," Management Science, INFORMS, vol. 25(3), pages 243-250, March.
  12. Shapiro, Carl, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 433-46, July.
  13. Gal-Or, Esther, 1986. "Information Transmission-Cournot and Bertrand Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 85-92, January.
  14. William Novshek & Hugo Sonnenschein, 1982. "Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 214-218, Spring.
  15. Gal-Or, Esther, 1985. "Information Sharing in Oligopoly," Econometrica, Econometric Society, vol. 53(2), pages 329-43, March.
  16. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 85-98, January.
  17. Malueg, David A. & Tsutsui, Shunichi O., 1996. "Duopoly information exchange: The case of unknown slope," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 119-136.
  18. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  19. Xavier Vives, 1990. "Trade Association Disclosure Rules, Incentives to Share Information, and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 409-430, Autumn.
  20. Richard N. Clarke, 1983. "Collusion and the Incentives for Information Sharing," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 383-394, Autumn.
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Citations

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Cited by:
  1. Einy, Ezra & Haimanko, Ori & Moreno, Diego & Shitovitz, Benyamin, 2008. "On the Existence of Bayesian Cournot Equilibrium," Discussion Papers 2008-11, Graduate School of Economics, Hitotsubashi University.
  2. Amir, Rabah & Jin, Jim Y. & Troege, Michael, 2010. "Robust results on the sharing of firm-specific information: Incentives and welfare effects," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 855-866, September.
  3. Sjaak Hurkens, 2012. "Bayesian Nash Equilibrium in ''Linear'' Cournot Models with Private Information About Cost," UFAE and IAE Working Papers 924.12, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Sjaak Hurkens, 2012. "Bayesian Nash Equilibrium in "Linear" Cournot Models with Private Information about Costs," Working Papers 674, Barcelona Graduate School of Economics.
  5. Fabio Tramontana, 2013. "Information exchange in a Cournot duopoly with nonlinear demand function," DEM Working Papers Series 049, University of Pavia, Department of Economics and Management.

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