Oligopoly Theory and Demand Uncertainty

This paper studies a Cournot model with incomplete but symmetric information, where the uncertainty concerns the intercept of a linear inverse demand function. It is shown that, in contrast to the standard results for the Cournot model with known demand: (1) there may exist multiple equilibria (that are symmetric and in pure strategies), in spite of the fact that both demand and cost are linear; and (2) expected social welfare may be larger when the firms do not know demand than when they do know demand. A key assumption behind these results is that market price cannot be negative: if the firms have been too optimistic about demand, so that a negative price is required for the market to clear, the price simply equals zero. This assumption, which is indeed a very natural one, has not been made in the earlier literature that models demand uncertainty. //Doc: Dem-unc-5-ESEM.tex//