Asymmetric Information without Common Priors: An Indirect Evolutionary Analysis of Quantity Competition
The common prior assumption justifies private beliefs as posterior probabilities when updating a common prior based on individual information. Common priors are pervasive in most economic models of incomplete information and oligopoly models with asymmetrically informed firms. We dispose of the common prior assumption for a homogeneous oligopoly market with uncertain costs and firms entertaining arbitrary priors about other firms’ cost-type to analyze which priors will be evolutionarily stable when truly expected profit measures (reproductive) success. When firms believe that all other firms entertain the same beliefs Nature’s priors are not the only evolutionarily stable priors. In a second model allowing for asymmetric priors Nature’s priors are not even evolutionarily stable.
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