Bertrand competition with one-sided cost uncertainty

This paper examines a Bertrand duopoly with homogeneous products and one-sided cost uncertainty. We characterize the undominated equilibria which yield the unique equilibrium payoffs. This uniqueness result could be applied to many important market situations. In particular, we apply our results to examine cost-reducing R&D by an entrant firm that enters a monopolistic market. While significant cost-reducing investments can result in a low marginal cost of production, we show that it may be optimal for the entrant to induce some technological uncertainty by restraining its investment level within certain limits as a means to ease any potential intense competition resulting from such investments.