Business Intelligence

Robustness To Strategic Uncertainty In Price Competition

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Executive Summary

The authors model a player's uncertainty about other players' strategy choices as probability distributions over their strategy sets. They 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 others. They apply this definition to Bertrand games with a continuum of equilibrium prices and show that the robustness criterion selects a unique Nash equilibrium price. This selection agrees with recent experimental findings.

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