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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 726:
Robustness to strategic uncertainty in price competition

Ola Andersson (), Cédric Argenton () and Jörgen Weibull ()

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.

Keywords: Nash equilibrium; refinement; strategic uncertainty; price competition; (follow links to similar papers)

JEL-Codes: C72; D43; L13; (follow links to similar papers)

16 pages, March 31, 2010, Revised April 8, 2010

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