Equilibrium in secure strategies in the Bertrand–Edgeworth duopoly model

Mikhail Iskakov, Alexey Iskakov

V. A. Trapeznikov Institute of Control Sciences, Ul. Profsoyuznaya 65, Moscow 117997, Russia

Abstract: We analyze the Bertrand–Edgeworth duopoly model using a solution concept of Equilibrium in Secure Strategies (EinSS), which provides a model of cautious behavior in non-cooperative games. It is suitable for studying games, in which threats of other players are an important factor in the decision-making. We show that in some cases when Nash–Cournot equilibrium does not exist in the price duopoly of Bertrand–Edgeworth there is an EinSS with equilibrium prices lower than the monopoly price. The corresponding difference in price can be interpreted as an additional cost to maintain security when duopolists behave cautiously and secure themselves against mutual threats of undercutting. We formulate and prove a criterion for the EinSS existence.

Keywords: Bertrand–Edgeworth Duopoly, Equilibrium in Secure Strategies, Capacity Constraints.

Language: English