14 - Information transmission – Cournot and Bertrand equilibria

Summary

We examine how incentives for two duopolists to honestly share information change depending upon the nature of competition (Cournot or Bertrand) and the nature of the information structure. While in earlier papers uncertainty is about an unknown common demand intercept, in the present paper uncertainty is about unknown private costs. The different information structure reverses the incentives to share information. While with unknown common demand sharing is a dominant strategy with Bertrand competition and concealing is a dominant strategy with Cournot competition, with unknown private costs sharing is a dominant strategy with Cournot competition and concealing is a dominant strategy with Bertrand competition.

Introduction

We examine how incentives for two duopolists to honestly share information change depending upon the nature of competition (Cournot or Bertrand) and the nature of the information structure. In contrast to earlier papers [Gal-Or (1985), Novshek and Sonnenschein (1982) and Vives (1984)], where uncertainty is about an unknown common demand intercept, in the present paper uncertainty is about unknown private costs. With an uncertain demand each firm observes a private signal of a parameter of the model which affects everyone's payoff function in the same way. With uncertain costs each firm observes a private signal of a parameter of the model which is different for each firm. While the first environment is called a “common value” problem in the auction literature, the second environment is called a “private values” problem in the same literature.