Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 0726: Robustness to strategic uncertainty in price competition

Ola Andersson (), Cédric Argenton () and Jörgen Weibull ()
Additional contact information
Ola Andersson: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Cédric Argenton: Tilburg University, Postal: CentER, PO Box 90153, 5000 LE Tilburg, The Netherlands,
Jörgen Weibull: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

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

JEL-codes: C72; D43; L13

16 pages, First version: March 31, 2010. Revised: April 8, 2010.

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