Bertrand Under Uncertainty : Private and Common Costs

This paper proposes an n-firm homogeneous-good Bertrand model with private information about costs. The model allows for any non-negative correlation between the cost draws and for any demand elasticity but still yields a closed-form solution. The solution is simple, in pure strategies, and involves price dispersion. For some parameter values, a weak version of the winner's curse arises. This framework is used to study the question whether cost uncertainty softens competition. Earlier literature has shown that the answer (perhaps counter-intuitively) is "no", while assuming:(i) independent cost draws and(ii) no drastic innovations. The analysis here shows that relaxing:(i) but not (ii) does not alter that result.However, when the cost draws are sufficiently highly correlated and the price elasticity of demand is sufficiently low, cost uncertainty indeed softens competition