Complete versus Incomplete Information in the Hotelling Model
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For the linear Hotelling model with firms located at the boundaries of the segment line, we study the price competition in a scenario of complete and incomplete information in the production costs of both firms. We compute explicitly the Nash price strategy in the cases of complete and incomplete information. We explicitly determine for the profit, consumer surplus and welfare, the quantitative economical advantages and disadvantages between having complete or incomplete information in the production costs. We prove that, in expected value, the consumer surplus and the welfare are greater with incomplete information than with the complete information and the difference is determined by the variances of the probability distributions. In expected value, the profit it is greater for the firm with higher variance for the probability distribution of its productions costs with incomplete information than with the complete information. However, in expected value, the profit can be smaller for the firm with lower variance for the probability distribution of its productions costs with incomplete information than with the complete information.
KeywordsProduction Cost Complete Information Incomplete Information Price Strategy Consumer Surplus
We are thankful to the anonymous referees for their suggestions. We acknowledge the financial support of LIAAD-INESC TEC through ‘Strategic Project—LA 14—2013–2014’ with reference PEst-C/EEI/LA0014/2013, USP-UP project, IJUP, Faculty of Sciences, University of Porto, Calouste Gulbenkian Foundation, FEDER, POCI 2010 and COMPETE Programmes and Fundação para a Ciência e a Tecnologia (FCT) through Project “Dynamics and Applications”, with reference PTDC/MAT/121107/2010. Telmo Parreira thanks FCT, for the PhD scholarship SFRH/BD/33762/2009.
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