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Robustness to strategic uncertainty in price competition

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Author Info

  • Andersson, Ola

    ()
    (Dept. of Economics, Stockholm School of Economics)

  • Argenton, Cédric

    ()
    (Tilburg University)

  • Weibull, Jörgen

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

We model a player's uncertainty about other player's strategy choices as probability distributions over their strategy sets. We call a strategy profile robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence of strategy profiles in each of which every player's strategy is optimal under his or her uncertainty about the pthers. We apply this definition to Bertrand games with a continuum of equilibrium prices and show that our robustness criterion selects a unique Nash equilibrium price. This selection agrees with available experimental findings.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 0726.

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Length: 16 pages
Date of creation: 31 Mar 2010
Date of revision: 08 Apr 2010
Handle: RePEc:hhs:hastef:0726

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Keywords: Nash equilibrium; refinement; strategic uncertainty; price competition;

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References

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  1. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  2. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-48, March.
  3. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  4. Weibull, Jörgen, 2006. "Price competition and convex costs," Working Paper Series in Economics and Finance 622, Stockholm School of Economics, revised 23 Feb 2006.
  5. Friedman, James W. & Mezzetti, Claudio, 2005. "Random belief equilibrium in normal form games," Games and Economic Behavior, Elsevier, vol. 51(2), pages 296-323, May.
  6. Carlsson, Hans, 1991. "A Bargaining Model Where Parties Make Errors," Econometrica, Econometric Society, vol. 59(5), pages 1487-96, September.
  7. Simon, Leo K & Stinchcombe, Maxwell B, 1995. "Equilibrium Refinement for Infinite Normal-Form Games," Econometrica, Econometric Society, vol. 63(6), pages 1421-43, November.
  8. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  9. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
  10. Abbink, Klaus & Brandts, Jordi, 2008. "24. Pricing in Bertrand competition with increasing marginal costs," Games and Economic Behavior, Elsevier, vol. 63(1), pages 1-31, May.
  11. Argenton, C. & Müller, W., 2009. "Collusion in Experimental Bertrand Duopolies with Convex Costs: The Role of Information and Cost Asymmetry," Discussion Paper 2009-87, Tilburg University, Center for Economic Research.
  12. Nash, John, 1953. "Two-Person Cooperative Games," Econometrica, Econometric Society, vol. 21(1), pages 128-140, April.
  13. Dixon, Huw, 1990. "Bertrand-Edgeworth Equilibria when Firms Avoid Turning Customers Away," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 131-46, December.
  14. Prabal Chowdhury & Kunal Sengupta, 2004. "Coalition-proof Bertrand equilibria," Economic Theory, Springer, vol. 24(2), pages 307-324, August.
  15. Carlsson, Hans & Ganslandt, Mattias, 1998. "Noisy equilibrium selection in coordination games," Economics Letters, Elsevier, vol. 60(1), pages 23-34, July.
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Cited by:
  1. Bajoori, Elnaz & Flesch, János & Vermeulen, Dries, 2013. "Perfect equilibrium in games with compact action spaces," Games and Economic Behavior, Elsevier, vol. 82(C), pages 490-502.
  2. Paolo E. Giordani & Michele Ruta, 2011. "Coordination Failures in Immigration Policy," Working Papers CELEG 1101, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  3. Argenton, Cédric & Müller, Wieland, 2012. "Collusion in experimental Bertrand duopolies with convex costs: The role of cost asymmetry," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 508-517.

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