Working Paper: CEPR ID: DP3901
Authors: Johan Lagerlf
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.
Keywords: Antitrust policy; Information sharing; Multiple equilibria; Non-negativity constraint; Trade associations; Value of information
JEL Codes: D42; D43; D80; L12; L13; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonnegativity constraint on price (D41) | multiple symmetric pure strategy equilibria (C73) |
| nonnegativity constraint on price (D41) | convex expected demand function (D11) |
| multiple symmetric pure strategy equilibria (C73) | strategic complementarity among firms' outputs (L10) |
| uninformed firms (L29) | greater expected total surplus (D69) |
| nonnegativity constraint (D10) | boldness effect (C92) |
| boldness effect (C92) | larger outputs by uninformed firms (L19) |