A Dynamic Duopoly Model with Asymmetric Information

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This paper investigates the impact of asymmetric information on the set of equilibria of a two-period duopoly game with price competition. It turns out that all admissible sequential equilibria of this game share a "collusive" character, i.e. ex-ante expected profits for a firm of any type are higher than in the complete information case. For small uncertainties the results are asymmetric: a small probability of a "good" type firm does not make much difference on the set of equilibrium payoffs, but a small probability of a "bad" type firm does. These results survive the introduction of Kohlberg-Martens' stability concept.