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

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Author Info
Lagerlöf, Johan N.M.

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

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Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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  1. Malueg, David A & Tsutsui, Shunichi O, 1998. "Oligopoly Information Exchange When Non-negative Price and Output Constraints May Bind," Australian Economic Papers, Blackwell Publishing, vol. 37(4), pages 363-71, December. [Downloadable!] (restricted)
  2. Gal-Or, Esther, 1986. "Information Transmission-Cournot and Bertrand Equilibria," Review of Economic Studies, Blackwell Publishing, vol. 53(1), pages 85-92, January. [Downloadable!] (restricted)
  3. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October. [Downloadable!] (restricted)
    Other versions:
  4. 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. [Downloadable!] (restricted)
  5. Rabah Amir & Val E. Lambson, 1998. "On the Effects of Entry in Cournot Markets," CIE Discussion Papers 1998-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
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  6. Shapiro, Carl, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Blackwell Publishing, vol. 53(3), pages 433-46, July. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x.
  11. Li, Lode., 1985. "Cournot Oligopoly with Information Sharing," Working Papers 561, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  12. 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. [Downloadable!] (restricted)
  13. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 52(1), pages 85-98, January. [Downloadable!] (restricted)
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  14. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October. [Downloadable!] (restricted)
  15. Lode Li, 1985. "Cournot Oligopoly with Information Sharing," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 521-536, Winter. [Downloadable!] (restricted)
  16. Gal-Or, Esther, 1985. "Information Sharing in Oligopoly," Econometrica, Econometric Society, vol. 53(2), pages 329-43, March. [Downloadable!] (restricted)
  17. Amir, Rabah, 1996. "Cournot Oligopoly and the Theory of Supermodular Games," Games and Economic Behavior, Elsevier, vol. 15(2), pages 132-148, August. [Downloadable!] (restricted)
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  18. Kai-Uwe Kühn, 2001. "Fighting collusion by regulating communication between firms," Economic Policy, CEPR, CES, MSH, vol. 16(32), pages 167-204, 04. [Downloadable!] (restricted)
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