Bertrand-Edgeworth Competition, Demand Uncertainty, and Asymmetric Outcomes

* We are grateful for comments from anonymous referees and an associate editor and from seminar participants at the 1998 Winter Meetings. This paper is a substantially revised version of a chapter of Wilson's 1997 University of Arizona Ph.D. thesis. Wilson acknowledges support from a National Science Foundation dissertation grant. Reynolds did much of his work while visiting CERGE at Charles University in Prague and acknowledges support from that institution. Abstract: We analyze investment and pricing incentives in a symmetric Bertrand-Edgeworth framework with uncertain demand. Firms choose production capacities before observing demand. Prices are chosen after demand is observed. If the extent of demand variation exceeds a threshold level then a symmetric equilibrium in pure strategies for capacities does not exist. A smaller firm has no incentive (ex ante) to expand its capacity because capacity expansion would reduce its expected revenue in the event that demand is lower than expected. Output prices are predicted to have positive variance when demand is low and zero variance when demand is high.