Bayesian Bertrand model
S. Barros1 , F.A. Ferreira1 , 2 , F. Ferreira2 and A.A. Pinto1
1
Departamento de Matem atica Pura, Faculdade de Ci encias da Universidade do Porto, Rua do Campo Alegre, 687, 4169-007 Porto, Portugal ESEIG - Instituto Polit ecnico do Porto, Rua D. Sancho I, 981, 4480-876 Vila do Conde, Portugal
Keywords: Bayesian game, Bayesian Nash equilibrium, Duopoly, Bertrand model, Dierentiation.
Abstract
Bayesian games are used to model situations in which there are players with privileged information, and where the payo of each player depends upon this privileged information, besides to depend upon the actions of the payers. We consider an economic model in which two rms compete on the prices of their products. Let E1 and E2 be two rms, sole producers of a dierentiated good. The rms simultaneously choose prices, respectively, p1 0 and p2 0. We suppose that the direct demand is linear, given by qi (pi , pj ) = a pi + bpj , where qi 0 is the quantity produced by rm Ei , the parameter a > 0 is the demand parameter, the parameter b [0, 2) represents the substitution level of the rm Ej s good by the rm Ei s good, and i, j {1, 2} with i = j . We suppose that each rm has two dierent technologies, and chooses one of them following a probability distribution. The utilization of one or the other technology aects the unitary production cost. The following probability distributions of unitary production costs are common knowledge: c1 = cA , with probability , cB , with probability 1 c2 = cH , with probability . cL , with probability 1
We suppose that cA > cB , cH > cL and cA , cB , cH , cL < a. The prot function for rm Ei is i (pi (ci ), pj (cj )) = (a pi (ci ) + bpj (cj ))(pi (ci ) ci ), where ci is rm Ei s unitary production cost, for i, j {1, 2} with i = j . Firm E1 would like to choose a price, either p 1 (cA ) or p1 (cB ), depending on its unitary produc tion cost, respectively, cA or cB ; and rm E2 would like to choose a price, either p 2 (cH ) or p2 (cL ), depending on its unitary production cost, respectively, cH or cL . To determine these prices, we are going to use the well-known notion of Bayesian Nash equilibrium. If rm E1 s unitary production cost is high, p 1 (cA ) is given by
arg max ((a p1 + bp 2 (cH ))(p1 cA ) + (1 )(a p1 + bp2 (cL ))(p1 cA )) ; p1 0
and if it is low, p 1 (cB ) is given by
arg max ((a p1 + bp 2 (cH ))(p1 cB ) + (1 )(a p1 + bp2 (cL ))(p1 cB )) . p1 0
If rm E2 s unitary production cost is high, p 2 (cH ) is given by
arg max ((a p2 + bp 1 (cA ))(p2 cH ) + (1 )(a p2 + bp1 (cB ))(p2 cH )) ; p2 0
and if it is low, p 2 (cL ) is given by
arg max ((a p2 + bp 1 (cA ))(p2 cL ) + (1 )(a p2 + bp1 (cB ))(p2 cL )) . p2 0
Bayesian Bertrand model
Then, we get that p 1 (cA ) = p 1 (cB ) = p 2 (cH ) = p 2 (cL ) = 2a(2 + b) + (4 b2 )cA + b2 E (c1 ) + 2bE (c2 ) , 2(4 b2 ) 2a(2 + b) + (4 b2 )cB + b2 E (c1 ) + 2bE (c2 ) , 2(4 b2 ) 2a(2 + b) + (4 b2 )cH + b2 E (c2 ) + 2bE (c1 ) , 2(4 b2 ) 2a(2 + b) + (4 b2 )cL + b2 E (c2 ) + 2bE (c1 ) . 2(4 b2 )
Thus, the expected prices of the goods produced by rms E1 and E2 are, respectively, E (p 1) = a(2 + b) + 2E (c1 ) + bE (c2 ) 2(4 b2 ) and E(p 2) = a(2 + b) + 2E(c2 ) + bE(c1 ) . 2(4 b2 )
In our work we also determine the output levels at the equilibrium, as-well the expected prots of both rms. Furthermore, we do some simulations to analyse the eect of the probabilities and over the rms expected prots. We conclude that each rm prots more when it uses its cheapest technology and the other rm uses its most expensive one, both with high probability.
References
J. Bertrand (1883). Th eorie math ematique de la richesse sociale. Journal des Savants, 499508. R. Gibbons (1992). A Primer in Game Theory. Pearson Prentice Hall: Harlow. N. Singh, and X. Vives (1984). Price and quantity competition in a dierentiated duopoly. Rand Journal of Economics, 15, 546554. D. Spulber (1995). Bertrand competition when rivals costs are unknown. Journal of Industrial Economics, 43, 111. X. Yin, and Y.-K. Ng (1996). Quantity precommitment and Bertrand competition yield Cournot outcomes: a case with product dierentiation. Australian Economic Papers, 36, 1422.
