Cournot outcomes under Bertrand–Edgeworth competition with demand uncertainty

Jason J. Lepore

Journal of Mathematical Economics, 2012, vol. 48, issue 3, 177-186

Abstract: We provide new results for two-stage games in which firms make capacity investments when demand is uncertain, then, when demand is realized, compete in prices. We consider games with demand rationing schemes ranging from efficient to proportional rationing. In all cases, there is a subgame perfect equilibrium outcome coinciding with the outcome of the Cournot game with demand uncertainty if and only if (i) the fluctuation in absolute market size is small relative to the cost of capacity, or (ii) uncertainty is such that with high probability the market demand is very large and with the remaining probability the market demand is extremely small. Otherwise, equilibria involve mixed strategies. Further, we show under efficient rationing that condition (i) is sufficient for the unique equilibrium outcome to be an equilibrium outcome of the Cournot game with demand uncertainty.

Keywords: Bertrand–Edgeworth duopoly; Demand rationing; Cournot duopoly; Demand uncertainty (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:48:y:2012:i:3:p:177-186

DOI: 10.1016/j.jmateco.2012.04.001

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