Information, Bertrand–Edgeworth competition and the law of one price

Edwards, Robert A.; Routledge, Robert R.

Abstract

Homogeneous goods often sell at different prices within the same market. This paper proposes a theoretical foundation for this phenomenon in the context of a capacity-constrained price game. Sellers have asymmetric information about the market demand, modelled by a partition of the state space, and evaluate uncertain profits in a way consistent with ambiguity aversion. We demonstrate that a pure strategy price equilibrium exists if the market demand is uniformly elastic in each state. Interestingly, the sellers may choose different prices, violating the law of one price. Moreover, market demand may be rationed between the sellers, resulting in consumers purchasing at different prices.

Citation

Edwards, R. A., & Routledge, R. R. (2022). Information, Bertrand–Edgeworth competition and the law of one price. Journal of Mathematical Economics, 101, Article 102658. https://doi.org/10.1016/j.jmateco.2022.102658

• Journal Article Type: Article
• Acceptance Date: Feb 6, 2022
• Online Publication Date: Feb 14, 2022
• Publication Date: 2022-08
• Deposit Date: Mar 15, 2022
• Publicly Available Date: Aug 12, 2022
• Journal: Journal of Mathematical Economics
• Print ISSN: 0304-4068
• Electronic ISSN: 1873-1538
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 101
• Article Number: 102658
• DOI: https://doi.org/10.1016/j.jmateco.2022.102658
• Keywords: Incomplete information; Bertrand-Edgeworth competition; ambiguity aversion; law of one price JEL: C72; C62; D43; L11
• Public URL: https://nottingham-repository.worktribe.com/output/7604374
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0304406822000179?via%3Dihub