Thursday, April 22, 2010
Posted by D. Daniel Sokol
Ola Andersson (Dept. of Economics, Stockholm School of Economics), Cédric Argenton (Tilburg University), and Jörgen Weibull (Dept. of Economics, Stockholm School of Economics) explore Robustness to strategic uncertainty in price competition.
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.