Insisting on a non-negative price: Oligopoly, uncertainty, welfare, and multiple equilibria

Abstract

I study Cournot competition under incomplete, but symmetric, information about the intercept of the linear demand function, while assuming that market price must be non-negative for all demand realizations. Although the non-negativity assumption is very natural, it has only rarely been made in the earlier literature. Yet it has important economic consequences: (1) expected demand effectively becomes convex, which means that multiple (symmetric, pure strategy) equilibria can exist; and (2) expected total surplus can be larger when the firms do not know demand than when they do. The arguments of the paper are relevant also for price competition and for uncertainty about, e.g., cost or the number of firms, and these issues are discussed.