On the efficiency of Bertrand and Cournot competition under incomplete information

Abstract

Bertrand competition is generally viewed as more efficient in welfare terms than Cournot competition. This paper shows that, after introducing incomplete information about rivals' costs, this is not always true: in a homogeneous oligopoly where costs are uniformly distributed, the Bertrand price (output) is higher (lower) than that of Cournot, if firms have sufficiently low costs. Moreover, individual firms' ex ante expected profits as well as their actually realised profits are often higher in the Bertrand game. Finally, it is shown that, even when the Bertrand price is higher than the Cournot price, the Bertrand model may still lead to a higher level of social welfare than the Cournot model because it is more productively efficient. © 2002 Elsevier Science B.V. All rights reserved.