Robustness to strategic uncertainty in price competition

Jörgen W. Weibull, Stockholm School of Economics

Abstract:  We model a player's uncertainty about other players' strategy choices, relative to a given Nash equilibrium, as a probability distribution anchored at that equilibrium. We define the Nash equilibrium to be robust to strategic uncertainty if it is the limit of some sequence of Nash equilibria of the correspondingly perturbed games as uncertainty vanishes. We apply this refinement to a class of games of price competition with convex costs and show that our robustness criterion selects a unique price out of the continuum of equilibrium prices. This selection agrees with experimental findings in Abbink and Brandts (2008).

Co-authors: Cedric Argenton (Tilburg University), Ola Andersson (Stockholm School of Economics)