13 - Duopoly information equilibrium: Cournot and Bertrand

Summary

In a duopoly model where firms have private information about an uncertain linear demand, it is shown that if the goods are substitutes (not) to share information is a dominant strategy for each firm in Bertrand (Cournot) competition. If the goods are complements the result is reversed. Furthermore the following welfare results are obtained:

(i) With substitutes in Cournot equilibrium the market outcome is never optimal with respect to information sharing but it may be optimal in Bertrand competition if the products are good substitutes. With complements the market outcome is always optimal.

(ii) Bertrand competition is more efficient than Cournot competition.

(iii) The private value of information to the firms is always positive but the social value of information is positive in Cournot and negative in Bertrand competition. Journal of Economic Literature Classification Numbers: 022, 026, 611.

© 1985 Academic Press, Inc.

Introduction

Consider a symmetric differentiated duopoly model in which firms have private market data about the uncertain demand. We analyze two types of duopoly information equilibrium, Cournot and Bertrand, which emerge, respectively, from quantity and price competition, and show that the incentives for information sharing and its welfare consequences depend crucially on the type of competition, the nature of the goods (substitutes or complements), and the degree of product differentiation.

The demand structure is linear and symmetric, and allows the goods to be substitutes, independent or complements.