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Bertrand Competition Under Uncertainty

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  • Maarten Janssen

    (Erasmus University Rotterdam)

  • Eric Rasmusen

    (Indiana University)

Abstract

Consider a Bertrand model in which each firm may be inactive with a known probability, so the number of active firms is uncertain. This activity level can be endogenized in any of several ways-- as whether to incur a fixed cost of activity, as output choice, or as quality choice. Our model has a mixed-strategy equilibrium, in which industry profits are positive and decline with the number of firms, the same features which make the Cournot model attractive. Unlike in a Cournot model with similar incomplete information, Bertrand profits always increase in the probability other firms are inactive. Profits decline more sharply than in the Cournot model, and the pattern is similar to that found empirically by Bresnahan and Reiss (1991).

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1309.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1309

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References

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  1. Elmar Wolfstetter & Walter Elberfeld, 1997. "A Dynamic Model of Bertrand Competition with Entry," Microeconomics 9701003, EconWPA.
  2. Gaudet, G. & Salant, S., 1988. "Uniqueness Of Cournot Equilibrium: New Results From Old Methods," Papers 89-10, Michigan - Center for Research on Economic & Social Theory.
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  4. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  5. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
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  10. McAfee, R. Preston & McMillan, John, 1987. "Auctions with a stochastic number of bidders," Journal of Economic Theory, Elsevier, vol. 43(1), pages 1-19, October.
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  13. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
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Citations

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Cited by:
  1. Baye, Michael & Morgan, John, 2004. "Brand and Price Advertising in Online Markets," Competition Policy Center, Working Paper Series qt9760k3hz, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  2. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005. "Interest rate dispersion in deposit and loan markets," Banco de Espa�a Working Papers 0506, Banco de Espa�a.
  3. Rasmusen Eric Bennett, 2006. "Strategic Implications of Uncertainty over One's Own Private Value in Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-22, November.
  4. Janssen, Maarten C.W. & Roy, Santanu, 2010. "Signaling quality through prices in an oligopoly," Games and Economic Behavior, Elsevier, vol. 68(1), pages 192-207, January.
  5. Mohamed Jellal & François-Charles Wolff, 2005. "Free Entry under Uncertainty," Journal of Economics, Springer, vol. 85(1), pages 39-63, 07.
  6. Vicki Knoblauch, 2002. "A Comparison of Two-Market Bertrand Duopoly and Two-Market Cournot Duopoly," Working papers 2002-14, University of Connecticut, Department of Economics.
  7. Charles Thomas, 2011. "The Price Effects of Using Firewalls as an Antitrust Remedy," Review of Industrial Organization, Springer, vol. 38(2), pages 209-222, March.
  8. Johannes Münster, 2006. "Contests with an unknown number of contestants," Public Choice, Springer, vol. 129(3), pages 353-368, December.
  9. Thomas, Charles J., 2002. "The effect of asymmetric entry costs on Bertrand competition," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 589-609, May.
  10. Ritzberger, Klaus, 2009. "Price competition with population uncertainty," Mathematical Social Sciences, Elsevier, vol. 58(2), pages 145-157, September.
  11. Maarten C.W. Janssen & Santanu Roy, 2007. "Signaling Quality through Prices in an Oligopoly," Tinbergen Institute Discussion Papers 07-081/1, Tinbergen Institute.
  12. Michael R. Baye & John Morgan, 2005. "Probabilistic Patents," Microeconomics 0504004, EconWPA.
  13. Thomas, Charles J., 2004. "The competitive effects of mergers between asymmetric firms," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 679-692, May.

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