Duopoly Pricing Under ‘Private Knowledge’ of Product Differentiation

Abstract

This note studies price decisions in a duopoly industry where firms have private information over the degree of product differentiation (product-type). A Bayesian-Nash price solution is derived assuming firms maximize their ‘certainty-equivalent’ profit levels. The comparative-statics indicate that increased risk aversion over the rival’s product triggers price competition. Consequently, the results of the study suggest revealing information is a higher reward strategy than concealing information in situations where rivals have asymmetric information over product type. These findings contribute to the industrial economic literature by generalizing the Bertrand equilibrium in an asymmetric information game model.