Centre for Development Economics
Department of Economics

Delhi School of Economics


Incomplete information price competition revisited: fixed costs matter


Krishnendu Ghosh Dastidar
(Jawaharlal Nehru University)


 Makoto Yano
(Kyoto University)

 (Thursday, 10 August, 3:15 PM IST)
Venue: Amex Room

In this paper we analyse price competition in a homogenous product market where a firm’s type is a cost parameter, c. All firms have the same fixed cost, k and this is common knowledge. We demonstrate the existence of a symmetric Bayesian-Nash equilibrium in the following cases. When k is in the intermediate range, i.e. k E ( k, k) a firm participates and chooses a price, a ( c, k), if its type, c < c* ( k), and chooses not to participate if c > c* ( k). The cutoff level, c* ( k), is strictly decreasing in k. The equilibrium price, a ( c, k), is strictly increasing in type c. W hen k is low enough, i.e. k E [O, k], all firms participiate. W hen k is high enough, i.e. k E [k,oo) no firm participates. We show that price quoted by any firm, a(c,k), is strictly increasing in k. That is, a higher fixed cost induces a firm to quote a higher price in equilibrim.
This resonates with real life experiences. We also demonstrate that with incomplete information the Edgeworth paradox can be resolved provided the fixed cost is above a certain critical level (k > k).

Keywords: price competition, incomplete information, fixed cost
JEL classification: D43, 113

All are cordially invited.

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