DP3901 Insisting on a Non-negative Price: Oligopoly, Uncertainty, Welfare and Multiple Equilibria

Author(s): Johan N.M. Lagerlöf

Publication Date: May 2003

Keyword(s): non-negativity constraint , multiple equilibria , value of information , information sharing , trade associations , antitrust policy

JEL(s): D42 , D43 , D80 , L12 , L13 , L40

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP3901.asp

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.