Bertrand Competition Under Uncertainty June

Consider a Bertrand model in which each rm may be inactive with a known probability, so the number of active rms is uncertain. This simple model has a mixed-strategy equilibrium in which industry pro ts are positive and decline with the number of rms, the same features which make the Cournot model attractive. Unlike in a Cournot model with similar incomplete information, Bertrand pro ts always increase in the probability other rms are inactive. Pro ts decline more sharply than in the Cournot model, and the pattern is similar to that found by Bresnahan & Reiss (1991). Janssen: Department of Economics, H09-20, Erasmus University, 3000 DR Rotterdam, The Netherlands. Fax: 31-10-2121724. Email: [email protected]. Rasmusen: Indiana University, Kelley School of Business, BU 456, 1309 E 10th Street, Bloomington, Indiana, 47405-1701. O ce: (812) 855-9219. Fax: 812-855-3354. Email: [email protected]. Web: Php.indiana.edu/ erasmuse. This paper is available on the web in Acrobat format at Php.indiana.edu/ erasmuse/@Articles/Unpublished/bertrand.pdf. We thank for their comments David Schmidt and seminars at the Indiana University Dept. of Economics and CIRANO in Montreal. Footnotes beginning with xxx are notes to ourselves for redrafting.