Bertrand Games and Sharing Rules

Bertrand games and sharing rules
Author(s): Steffen H. Hoernig

Source: Economic Theory , June 2007, Vol. 31, No. 3 (June 2007), pp. 573-585
Published by: Springer
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Economic Theory (2007) 31: 573-585
DOI 10.1007/S00199-006-0112-8
RESEARCH ARTICLE
Steffen H. Hoernig
Bertrand games and sharing rules
Received: 18 September 2003 / Accepted: 29 March 2006 / Published online: 25 April 2006
? Springer-Verlag 2006
Abstract We consider asymmetric Bertrand games with arbitrary payoffs at ties

or sharing rules, and identify sufficient conditions for the zero-profit outcome and
the existence of Nash equilibria. Subject to some technical conditions on non-tied
payoffs the following hold. If the sharing rule is strictly tie-decreasing all players
but one receive zero equilibrium payoffs, while everybody does so if non-tied pay
offs are symmetric. Mixed (pure) strategy Nash equilibria exist if the sharing rule
is (norm) tie-decreasing and coalition-monotone.
Keywords Bertrand games ? Sharing rule ? Tie-decreasing sharing rule ? Coalition

monotonicity
JEL Classification Numbers C72 D43 LI3
1 Introduction
The level of equilibrium profits and the existence of Nash equilibria in Bertrand
oligopolies have been thoroughly researched in the last 30 years. The results ob
I would like to thank Fernando Branco, the audience at Pompeu Fabra (Barcelona), 1SEG (Lisbon),
University of Mannheim, ESEM 2003 (Venice), EARIE 2005 (Porto), two anonymous referees,
and the editor Dan Kovenock for very useful comments. This research received financial support
under project POCTI/ECO/37925/2001 of FCT and FEDER.
S. H. Hoernig
School of Economics, Universidade Nova de Lisboa,
Campus de Campolide, 1099-032 Lisboa, Portugal
S. H. Hoernig (El)
CEPR, London, UK
E-mail: shoernig@fe.unl.pt

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574 S. H. Hoemig
tained naturally depend on properties of the demand and cost specifications, and,
less obviously, on the sharing or tie-breaking rule embodied in the payoffs. While
interest has focused on the former, the latter have rarely been considered, even
though candidate equilibria will typically involve ties at the lowest price.
The classical sharing rule in Bertrand oligopoly is "equal sharing", where each
player receives an equal portion of demand. Researchers concentrated on the effects
of returns to scale. For two symmetric players, Harrington (1989) has shown that
pricing at marginal cost is the unique equilibrium when demand is bounded, con
tinuous and has a finite choke-off price, and if returns to scale are constant. With
more than two symmetric players there is a continuum of zero-payoff equilibria
where at least two players always choose actions equal to marginal cost, and the
other firms randomize arbitrarily between actions not lower than marginal cost. On
the other hand, Kaplan and Wettstein (2000) have shown that infinite monopoly
payoffs are not only sufficient but also necessary for positive-pay off Nash equilibria
in Bertrand duopoly if returns to scale are constant and demand is continuous.1
If returns to scale are not constant then the situation is much more complicated.
Dastidar (1995) has shown that under decreasing returns to scale there is a con
tinuum of pure strategy equilibria where players make positive payoffs, and one
zero-profit equilibrium. Later, Hoernig (2002) amplified this result by proving that
there is also a continuum of mixed strategy equilibria. On the other hand, below
we present an example where under increasing returns to scale neither pure nor
mixed strategy Nash equilibria exist.
More recently, Sharkey and Sibley (1993) and Baye and Morgan (1999) have
assumed that a single randomly selected player serves all demand. This has been
dubbed "winner-take-all" sharing by Baye and Morgan (2002), and coincides with
the equal sharing rule in Bertrand oligopolies with constant returns to scale. For
this sharing rule, Baye and Morgan (1999) have demonstrated the sufficiency of
infinite monopoly profits for positive profits in Nash equilibrium, while Baye and
Morgan (2002) have shown that necessity breaks down if payoffs have disconti
nuities other than those at ties. More importantly, Baye and Morgan (2002) have
established that with symmetric non-tied payoffs and winner-take-all sharing a zero
profit Nash equilibrium exists if and only if there is an "initial break-even price".2
To our knowledge, no other sharing rules have been considered explicitly. An
alternative approach, where sharing rules are part of the equilibrium rather than
part of the definition of the game, is that of "games with endogenous sharing rules"
of Simon and Zame (1990). In this context a sharing rule is some selection from
the convexification of payoffs at discontinuities. While there is always a selection
such that an equilibrium exists, nothing is said a priori about the properties of this
selection, which may be highly sensitive to the specification of the model. Fur
thermore, this approach does not comprise games such as Bertrand oligopoly with
decreasing returns to scale, since payoffs at ties may lie outside the convex hull of
non-tied payoffs.
We consider "Bertrand games" with generically asymmetric payoffs, not neces
sarily derived from demand and cost functions. Furthermore, no a priori restrictions
1 They do not mention the latter assumption explicitly, but still they use it in their proofs.
2 while their theorems are stated for a symmetric sharing rule, the authors mention that their
results hold for all asymmetric winner-take-all sharing rules, too.

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Bertrand games and sharing rules 575
are imposed on the shape of sharing rules. Rather, we uncover the properties that
will have an effect on the existence and type of equilibria.
In doing so, we show which properties non-tied payoffs and the sharing rule
must have to make positive equilibrium payoffs possible. We demonstrate that when
one rules these properties out generically all but one player have zero equilibrium
payoffs, while everybody has zero payoffs if non-tied payoffs are symmetric (even
if the shari ng rule is not). The relevant restriction to be imposed on the sharing rule
is that it be "strictly tie-decreasing". This notion means that a tied player's payoffs
is lower than what he would receive at the same action if he were not tied with
anyone else. This result therefore sheds new light on the question of "Bertrand par
adox" outcomes, generalizing Kaplan and Wettstein (2000) and Baye and Morgan
(2002) to asymmetric payoffs and arbitrary sharing rules.
The existence of Nash equilibria in games with discontinuities, and in the Ber
trand oligopoly in particular, has attracted much attention. We do not attempt to
generalize existing results by offering even weaker conditions for the existence of
equilibria, but rather determine the conditions that must be imposed on the sharing
rule so that the resulting game satisfies the assumptions of the well-known existence
theorems in Dasgupta and Maskin (1986) and Reny (1999). The main additional
restriction is that the sharing rule be "coalition monotone": the sum of payoffs of
tied players increases with the group of tied players. As concerns the existence of
mixed strategy equilibria, we assume that the sharing rule is weakly tie-decreasing,
coalition-monotone, and "sum-upper semi-continuous". For pure strategy equilib
ria the first requirement must be strengthened to "norm tie-decreasing", mainly in
order to render payoffs quasiconcave.
Finally, we demonstrate how to quickly prove whether a given Bertrand game
has neither pure nor mixed strategy Nash equilibria. In zero-sum games this is not
very difficult: it is enough to show that the maximin and minmax-values differ, see
Sion and Wolfe (1957). For non-zero-sum games, however, this can be a surpris
ingly hard exercise.
In section 2 we present the model and definitions. Nash equilibria are analyzed
in section 3, while section 4 considers their existence. Section 5 concludes.
2 The model
Let = {1,..., n] be a set of > 2 players who simultaneously choose actions

Pi R+ = [0, oo),i N. Players' payoffs are functions u? : R+ -> R to be
described in the following.
For each vector of actions (p\,..., pn) e R"+ define the "winners" as the play
ers tied at the smallest action, W (p\,..., pn) = {/ N\p? = mmjeN pj). The
set of all possible groups of winners is = 2*v\{0}, and for each / TV the set
, = {V |/ e V] contains all groups of winners in which player / takes part.
If for any ( , V) R+ player / receives n?(p, V), we define payoffs as
Ui (pi, p-i) = ,? (pi, W (pi, /?_,?)), (1)
for each (p?, /?_/) R^_, where /?_,? = (p\,..., p,_i, p/+i ,..., pn) e R+"1.
If W (pi, p-i) = {/} then player / receives the "non-tied payoff" of ir; (p?)
Ki (Pii (OX ar,d if * N\W (pi, p-i) he receives zero because he has not won.

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576 S. H. Hoernig
This is the standard Bertrand payoff specification. We will assume that payoffs are
bounded: there is M e (0, oc) such that | ,?( , V)\ < M for all (/?, V) R+
and i . The "sharing rule" is given by the payoffs at ties for the lowest action:
Definition 1 A sharing rule is defined by ,?(/?, V) for all ( , V) el+x /\{/}

and i .
The above definition of payoffs can be extended to mixed strategies, i

cumulative distribution functions, as in Osborne and Pitchik (1986). Let
the set of mixed strategies on R+, and An = ,? , the set of tuples of mi
strategies. Let F_; = (F\,..., F?-\, F?+],..., Fn) A ~] be a tuple of mi
strategies by all players other than /. Defining aj(p) = Fj(p) ? limp>/<p Fj (//)
as the size of the atom (if any) in F? at e R+, (expected) payoffs are
ui ( , F-j) = *\jeV\{i)
VeQi (p> ) l/?i( ) I ( /0 - w) J ? (2)
\j N\V
The summation is over the sets V of players tied at lowest action p?. The games that
we will consider in the following are (bounded, potentially asymmetric) "Bertrand
games" = ( , , { ,?}^).
If there is a function : R+ R such that ?j(p) = ( ) for all e R+
and i , non-tied payoffs are symmetric. 3 In this case the sharing rule may still
differ between players, which can be used to model e.g. incumbency advantages if
players are otherwise symmetric.
We now consider the conditions to be imposed on sharing rules. For any R+
and V , let ( , V) = ( , V) be the sum of payoffs of the players
in V if they are winners and tied at p.
Definition 2 A sharing rule is

L weakly (strictly) tie-decreasing for player i e at e R+ if?i(p) > (>)
Xi(p,V) far all V e ;\{/} with ,?(/?, V) > 0. It is tie-decreasing if it is
tie-decreasing for all e R+ and i
2. nomi tie-decreasing if either \( ) < Ttj(p, V) < QorO < /( , V) < ??(p)
for all R+ and V e ,?
3. coalition-monotone if ( , ) < (/?, V)for e R+ and C V
4. sum-use if"lim sup^j, (p\ V) < (/?, V) for e R+ and V
A sharing rule is tie-decreasing if payoffs at ties are below non-tied payoff at
the same action. A sharing rule that is not tie-decreasing may generate positive
equilibrium payoffs, as we will see below.
Coalition monotonicity means that the joint payoffs of tied players do not
decrease as more players join the tie. Together with condition 2 it is used to show
existence of equilibrium.
In the classical symmetric Bertrand oligopoly model players are firms in an
industry selling a homogeneous good, and actions are prices. If Z), C : R+ R+
are the demand and cost functions, respectively, non-tied payoffs are ( ) =
3 Hoernig (2005) considered Bertrand games where non-tied payoffs and the sharing rule are
symmetric.

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Fig. 1 One player may make positive equilibrium payoffs. The Nash Equilibria may involve both
positive and zero profits
pD(p) ? C(Z)(p)). Two well-known sharing rules in the Bertrand model are
equal sharing and winner-take-all sharing. Equal sharing amounts to nfq(p, V) =
pD(p)/\V\ ? C(D(p)/\V\) if / e V: Each winning firm receives an equal share
of demand. This is the sharing rule traditionally posited. Winner-take-all sharing
implies that one randomly selected winner receives all demand, and results in pay
offs at ties of *ta ( , V) = ( ) /1V | if / V. It is immediate that under constant
returns to scale, C(q) = cq for some c > 0, the payoffs under the two sharing
rules coincide,
,e ( , V) = ( - c)D(p)l\V\ = ^wta(p, V). (3)
3 Zero equilibrium payoffs
Let (F*,_F*) 6 77 be a Nash equilibrium,4 with equilibrium payoffs Uf =
ui(F;,Fli)>ui (Fi,Fli) V F/ 6 , Vi e . (4)

Let S* ? R+ be the support of F* ,i e N. The sets Sf are closed, and bounded from
below. Necessarily u\ (p/, F*f) < U* for all p/ e R+, and u\ (p/, F*?) = U* for
all pi e * = 5*\Z*, where Z* is a set of F* -measure zero such that u? ( /, F*?)<
U* for all p/ 6 Z*. The possibility of actions p? S* with u? (p/, F*.) < U*
complicates some of our arguments below.
We first highlight some of the equilibrium configurations that can be encoun
tered. The following example demonstrates that even in symmetric games not all
players need to have either positive or zero payoffs (Figure 1).
In the following stars will always denote Nash equilibrium values.

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578 S. H. Hoernig
Example In a Bertrand duopoly with two symmetric firms/ j demand is D(p) =

max{0, 1 ? p}, and the cost function is given by C (0) = 0, C(q) = 1/6 for
q (0, 1 /3], and C(q) = \ /4 for q > 1 /3.
With equal sharing there is no symmetric pure strategy equilibrium. Instead
there is a continuum of mixed strategy equilibria where firm / plays p? =2/3 with
certainty, while player j randomizes between an atom at pj = 1/2 and actions
larger than 2/3. Payoffs are Uf = (l - a*(1 /2)) /18, and UJ = 0. A limit case
is the zero-payoff pure strategy equilibrium with a* (1/2) = 1.
For any Nash equilibrium let 7* = {/ ,? | Uf > 0} and 7* = N\7* be the

sets of players with positive or zero equilibrium payoffs, respectively. Negative
equilibrium payoffs are not possible if non-tied payoffs are bounded from below
since deviations to higher actions are always possible.
For V c and e R+ let A*(p, V) = j; V\a*(p) > oj be the players

in V who have an atom at p. For each / e let tf = max Sf R+ U {oo},
and let /* = min/e^ r*. The following Lemma lists some properties of Bertrand
equilibria.
Lemma 1 Let (F*,..., F*) bea Nash equilibrium of a bounded Bertrand game:
L IfJ* (S then t* < oo. Wehavetf = t* forall i J*tandlimp/>t* Ff ( ) < 1

forali j 7*. 7/'|7* j > 1 then af (r*) > 0/ora// / y*.
2. For all j e 7*, ;( ) < 0 for almost all [ , f*].
J. If non-tied payoffs are symmetric and J* 0 /7z<? seto *, / 7*, c/n? count
able.
Proof 1. Fix / A" , and let p; be any point in Sf, and 0/ C R+ any open neigh
borhood around this point. The set Sf has positive mass under F*, because
otherwise would be a strictly smaller closed set containing probability mass
1, a contradiction to Sf being the smallest such set by definition. This implies that
Sf contains members of P*. Since this is true for all points p? and neighbor
hoods , the set P* is dense in Sf for all / e .
For all / e and e R+, let G*(p) = l-F*(p)+af(p) = lim/)Vp F* ( '),
which is left-continuous in p. Clearly, max {ar*(p), 1 ? F*(p)} < G*(p) < 1 for
all e R+, and limôo G*(p) = 0? From (2), for all / and R+, and
since payoffs are bounded from above,
ui (p, F*f) < | ,?( , V.)|[]G*(p) < 2"-]Mf]G*(p), (5)
thus lim^ôo (p, F*,.) < 0 . For all / 7* the support Sf must therefore
have a finite maximum f*, and sup P* = r* because P* is dense in Sf. Let r* =
min/ y* tf. If there is any /' 7* with f* > r* then w/ ^p, F*^ = 0 for all
^f*, f*j since G*(p) = 0 for some player / with tf = r*. This is a contradic
tion to sup P* = r*, thus f* = r* for all / 7*.

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By (5), for every / e
lim sup w/ ( , F*) <2n]MT] lim G*(p) = 2n~l M G*? (**) ?
Ifthereisany y// such that G =0 this implies that lim sup^,* m; (/?, F*.) <0,
which is a contradiction to ?7* > 0 and sup P* = r*if/ 7*. Therefore G*(f) > 0
for all j i if ? G i*, which implies lim/?/^* F*( ) < 1 for all y 7*, and
r* F* and a*(t) > 0 for all j e J*\{i}. If \J* \ > 1 then the latter must be true
for all j 7*, while we cannot even deduce r* 6 F* if 7* = {/}.
2. Fix a player / e 7*, and let r*/ = min;^/ r*. If there is any /? e [ ,
such that ??(p) > 0, then there must be V e / such that cx%(p) > 0 for all
k e V\{i] and ,?(/?, V) < 0, otherwise player / would deviate to p. Since there
can be only countably many atoms this implies there are only countably many
actions [ , f*,-] such that ??(p) > 0. Finally, f* < /*. for all / TV.
3. Assume now that / (/?) = (/?) for all i e and e R+, that 7^ ^ 0, and
that for some player j e 7* the set F* is uncountable. Since all S*,i e , can con
tain only countably many atoms, there is e PJ with < t* such thato/*(/?) = 0
for all i N. Player f s payoffs at this action are ( ) /^/ 0 ~ F* ( ))? Since
F*( ) < 1 for all / /" we must have (/?) < 0 if / 7*, which is a contradiction
to 6 F*. The sets PJ, j e J*, are therefore countable, and can contain only
atoms and a countable number of limit points of atoms, whose total mass must then
be equal to 1 . The statement for 7* = {j} then follows from r* = sup F* (Note
that we still cannot conclude that r* e PJ).
The first statement of the Lemma means that the equilibrium supports of all
players earning positive payoffs in equilibrium have a joint finite maximum f *,
while the equilibrium supports of players earning zero payoffs either have maxi
mum r* (in this case r* is an atom for these players) or extend further. The action
r* is an atom for all players in 7* if there are at least two.
The second and third statements deal with equilibria where both positive and
zero payoffs are present. The former statement shows that zero equilibrium payoffs
arise from zero non-tied payoffs. As for the latter statement, Hoernig (2002) has
shown that if all players receive positive payoffs then the equilibrium F*'s may be
uncountable. Lemma 1 explicitly rules this out if non-tied payoffs are symmetric
and there is at least one player with zero payoffs. The assumption of symmetry
cannot be dropped in statement 3, as the following simple example shows: Let
?\(p) = 1 and n2(p) = 0 for all R+, with an arbitrary non-positive sharing
rule. Choose as 5* any uncountable compact set in R+, and let S% C (i*, oo). Any
pair of distributions on these supports will constitute a Nash equilibrium.
Let us recall the following definition in Baye and Morgan (2002): A function
/ : R ? R is left lower semi-continuous (Use) at e R if lim infxr^x f (xf) >
f(x). The following Lemma contains two important results on Nash equilibria
with positive payoffs. To rule out trivial positive payoff equilibria at = 0, where
no undercutting is possible, we impose:
Condition Z: There is no V with max/ y ,?(0, V) > 0 and
min/ y /(0, V) > 0.

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580 S. H. Hoemig
Lemma 2 Consider a bounded Bertrand game satisfying condition . Let (F*,

F*) be a Nash equilibrium with J* 0, and consider U,-G j* /".
7. 7/|A*(p, TV) j > 1 i/?cre is a player i e J* such that if/(p) > 0 and ?? is not
Use at p, or the sharing rule n? is not strictly tie-decreasing at p.
2. If non-tied payoffs are symmetric and Jl 0, there is a player i 7* such
that if/(p) > 0 and if/ is not Use at p, or the sharing rule n? is not weakly
tie-decreasing at p.
Proof Condition rules out Nash equilibria at ? 0 involving positive payoffs.

Fix i e J*. By assumption 0 ? F* and r* > 0. For each e * it follows
from < f* that G*(p) > 0. Letting
a*(p) / a?(p)\
Rtv^= #7^x
jeV\{i) ?J{P) O-^y)
keN\V V ?k(P)/
for all V / and e F*, we can write payoffs ( 2) as
Uf (p, F*,.) = ?*( ) x R*v(P)*i(P> V).
The term F*v(p) is the probability that only the players in V are tied at
p, conditional on all players other than / choosing actions greater or equal t
p. Then 0 < F*v(p) < 1 and ^ ,? ^/V(P) = 1? Theref?re> the expres
\/ , R*y(p)nj(p, V) is a weighted average of { /( , V)}Vgq.. and is str
positive since e F*.
As in Uj^jS* there are only countably many atoms, there is an increa
sequence {pi}fl\ C R+, with lim/_ôo / = and (p/, jV\{/}) = 0 for
/ e N. By underbidding slightly, player / can guarantee himself, in the lim
least the payoff
lim1-+O?
inf if/ ( xx
/) G?xx?
( /) = /->oo
TT G/(p) lim inf if/ ( /)
>nG/^lim inf
Since p g F* it is necessary that

If either if/(p) < 0 or if / is Us
if/( ). If |A*(p, N)\ > 1 then there
F*{/|(p) < 1. It follows that there is
; /( , V) > 7f/(p).
On the other hand, if non-tied payo
statement 2 in Lemma 1 necessarily (
Therefore lim infp>^p if ( ') < 0. If
case, from which follows that there

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Excluding cases 1 and 2 in Lemma 2 allows us to state our main result about
the necessity of zero equilibrium payoffs:
Theorem 1 Let be a bounded Bertrand game satisfying condition At most

one player Iws positive Nash equilibrium payoffs, or all players have zero payoffs
if non -tied payoffs are symmetric, if
1. non-tied payoffs are left lower semi-continuous where positive; and

2. the sharing rule is strictly tie-decreasing.
Proof If 17* i > 1 then by Lemma 1 we have \A* (r*, N)\ > 1. On the other hand,
if |y* i = 1 then J* 0. Lemma 2 leads to a contradiction.
This theorem generalizes Theorem 2 in Baye and Morgan (2002), which estab
lished the necessity of zero equilibrium payoffs under symmetric non-tied payoffs
and winner-take-all sharing, to arbitrary asymmetric non-tied payoffs and shar
ing rules. The boundedness assumption and condition 1 were present in Baye and
Morgan (2002), while condition is implied by their assumption that an "initial
break-even price" exists. Boundedness from above is needed to avoid "bootstrap
equilibria" as in Baye and Morgan (1999) and Kaplan and Wettstein (2000), and
boundedness from below guarantees that no player has negative equilibrium pay
offs. As concerns the continuity condition 1, Example 2 in Baye and Morgan (2002)
shows that it cannot be dispensed with.
Our new condition 2, which is trivially satisfied by the winner-take-all sharing
rule, implies that payoffs at ties cannot be higher than non-tied payoffs. Thus there
can be no Nash equilibrium sustained by positive payoffs at a tie while non-tied
payoff is lower close to the tied action. The latter occurs for example in Bertrand oli
gopoly with decreasing returns to scale and equal sharing, as described by Dastidar
(1995). Here equal sharing is not tie-decreasing since the smaller individual outputs
at ties lead to more than proportional cost reductions.
Since we allow for asymmetric non-tied payoffs the claim of zero equilibrium
payoffs for everyone must be weakened to "all but one". Let us consider the clas
sic example of Bertrand duopoly with continuous demand D and marginal costs
ci>c\ 5: 0? Non-tied payoffs ?? ( ) = ( ? q) D(p) are not symmetric. Together
with any strictly tie-decreasing sharing rule this game fulfils the assumptions of
the Theorem. Hence (c2, {1, 2}) < 0, and the following is a Nash equilibrium
where the low-cost firm makes positive profits: p\ = C2, and player 2 randomizes
according to F2 (p) = 1 ? ?i\ (c2) / \( ) for all [c2, co). 5 Note that the
text-book Nash equilibrium p\ = p2 = c2 must be supported by a sharing rule
with tc\ (C2, {1, 2}) =7Ti (c2) and 2 (c2, {1, 2}) = 0, which violates condition 2.
If non-tied payoffs are symmetric then any equilibrium action resulting in pos
itive payoffs for some but not all players must have a discontinuity in non-tied
payoffs or the sharing rule is not tie-decreasing. That is, the restrictions on payoffs
are much stronger than under asymmetry. For example, non-tied payoffs in Figure 1
violate condition 1 at its point of discontinuity.
5 Equilibria of this type have been described in Deneckere and Kovenock (1989, p. 22, 1996,
p. 16). See Blume (2003) for a rediscovery of this result under the equal sharing rule.

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582 S. H. Hoernig
4 Existence of Nash equilibria
In order to motivate the following results on the existence of equilibria, we give a

simple example where under equal sharing no Nash equilibrium exists, while the
same game with winner-take-all sharing has a zero-payoff Nash equilibrium, as
shown in Vives (1999, p. 118).
Example In a symmetric Bertrand oligopoly there are > 2 players and demand
is D(p) = max{0, 1 ? /?}. The cost function is given by C(0) = 0 and C(q) =
C (0, l/4)_for q > 0. With equal sharing, for all V e we have ( ) =
(1 - p)p - C > ( , V) = (1 - p)pl \ V\ - C where ( , V) > 0, thus equal
sharing is tie-decreasing. Since is Use where it is positive and maximum payoffs
are finite, by Theorem 1 there are no Nash equilibria involving positive payoffs for
any fimi Figure 2.
Assume now that there is a zero-payoff equilibrium, and wlog order firms such
that r* < /| < ? ? ? < f*. The highest action such that there are only countably
many < with ( ) > 0 is = p}, thus from statement 2 of Lemma 1 it
follows that r* = r* < . Applying the reasoning in that statement's proof to firm
1 shows that we must also have r| ^ y On the other hand, since ( , V) < 0
for all < and V e , no finn chooses any price below p] in equilibrium,
therefore necessarily a* [p^ = * [p^ = 1? The latter is not possible in Nash

equilibrium since ^p}, < 0 for all V e with \ V\ > 1. As a result, under
equal sharing no pure or mixed strategy Nash equilibrium exists.
In this example the sum of payoffs is not upper semi-continuous, violating
one of the assumptions of the Dasgupta-Maskin existence theorem (Theorem 5 in
Dasgupta and Maskin (1986)). Neither are payoffs "better-reply secure" as defined
by Reny (1999): It is enough to consider the non-equilibrium point p? = _ for all
/ e . There are paths involving zero payoffs that converge to this point, but there
is no deviation from it that results in strictly positive payoffs. The non-existence
result is therefore not contradicted by these existence theorems.
Fig. 2 No pure or mixed equilibria because of increasing returns to scale and equal sharing

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We now present two existence theorems, one for mixed and one for pure strategy
equilibria. The first one is based on Theorem 5 in Dasgupta and Maskin (1986),
while the second one follows from Corollary 3.3 in Reny (1999).
Theorem 2 A bounded Bertrand game 1ms a mixed strategy Nash equilibrium if
1. for all i there are actions p\ R+ such that ?\ ( /) > 0, and non-tied
payoffs if/ are continuous on [0, /?;];
2. the sharing rule is weakly tie-decreasing, sum-use and coalition monotone.
The first part of Assumption 1 allows us to restrict the pure strategy space to
[0, pi ], while the assumption of continuity of if/ is stronger than strictly necessary.
We make it here to concentrate on the sharing rule. Assumption 2 guarantees that
at ties the assumptions of the Dasgupta-Maskin theorem hold. Payoffs are weakly
lower semi-continuous since the sharing rule is tie-decreasing, while the sum of
payoffs is upper semi-continuous because of the other two conditions. The latter
two conditions can be weakened using the concept of "reciprocal upper semi-con
tinuity" (see e.g. Reny 1999, p. 1034). We we have opted for the above formulation
because they are intuitive and easy to verify.
Proof 1. We restrict the pure strategy spaces to the bounded intervals [0, /?/] in
order to apply Theorem 5 in Dasgupta and Maskin (1986). Any Nash equilibrium
in the restricted game extends to a Nash equilibrium in the original game if no player
has negative equilibrium payoffs in the restricted game: no upward deviation can
increase payoffs since equilibrium supports are in [0, p/].
We now show that in the restricted game no player has negative equilibrium
payoffs. Since if/ is continuous and ir; ( ,?) > 0, for each player i there
are uncountably many [0, p?] with ir/ ( ) > 0. Let (F*,..., F*) be a Nash
equilibrium of the restricted game. Since there can only be countably many atoms
in F*y, for each player i there is [0, /] with if/(p) > 0 and a* (p) = 0 for
all j i. Thus ui (p, F*.) = if/(p) ,>, (l ~ FJ(P)) > ?* and Pla>'er ' could
deviate to if he had negative equilibrium payoffs.
2. We now establish weak lower semi-continuity of u? (., p_/).Fix (pi,..., pn)
R+,letp = minjeN Pj and V = W (pi,p?).If/ N\Vthcnut (p?, _;) =
0 in a neighborhood of p\, so that u? is continuous at p? .Ifi V then u? ( p?, ?/ ) =
m(p> V7), ut ( ?, p~i) = 0 for p\ > and w? ( ', p_/) = ?? ( ?) for p? < p.
Therefore u? is wise at p/ if there is e [0,1] such that lim inf^^p if/ (p^) >
(F? ^s ???S continuous we have lim infp:^p if/ ( ,?) = if/ (p), and since the
sharing rule is tie-decreasing this holds with = 1 if if/(p) > 0 and = 0 if
if/(p) < 0.
3. As a third step we establish upper semi-continuity of the sum of payoffs U =
]T/ iV ?/. Fix (pi,..., pn) R;|, let = minjeN pj, and V = W (pi,..., pn).
Since the losers' payoffs are zero in a neighborhood of this point, and since their
actions are bounded away from p, we only need to take into account the payoffs
and actions of players in V7. For any set of actions in a small neighborhood of
there are c V and p! e R+ such that the sum of payoffs is equal to (p\ F).
Therefore U is use at (pi,..., pn) if and only if
( , V) > max ( , F), lim sup ( ', ) V C V7,

f:ffff:ffff:ffff:ffff:ffff:ffff:ffff on Thu, 01 Jan 1976 12:34:56 UTC
584 S. H. Hoeniig
which implies that (., V) must be use at p. Since the same applies to (., ) it
is enough to impose ( , V) > ( , ) for all ? V, i.e. that the sharing rule
be coalition monotone.
4. Since payoffs are bounded and have discontinuities only at ties, the assump
tions of Theorem 5 in Dasgupta and Maskin (1986) are satisfied for the restricted
game. A mixed strategy Nash equilibrium (F*, .., F*) exists.
We now turn to the existence of pure strategy Nash equilibria. We need two
additional assumptions which guarantee that payoffs are quasi-concave:
Theorem 3 A bounded Bertrand game has a pure strategy Nash equilibrium if
L for all i there are actions p\ R+ such that if/ (p?) > 0, and non-tied
payoffs if/ are continuous and quasiconcave on [0, /?/];
2. the sharing rule is norm tie-decreasing, sum-use and coalition monotone.
Proof 1. Again we restrict action spaces to [0, pi] and find a Nash equilibrium
for the restricted game which then extends to the original game.
2. Payoffs are quasiconcave. For player / A', since if/ is quasiconcave and
if/ (Pi) > 0, for each ? e [0, p?] the function with values ir/ ( ) if < , and
0 if > , is quasiconcave. Since the sharing rule is norm tie-decreasing ?,? is
quasiconcave in /?;.
3. The restricted game is also payoff-secure, i.e. for each player / e and given
any e > 0 and (p?, p-?) e / [ , pj], there is \ [0, p?] and a neighbor
hood B-i of p-i such that u? (/?/, pf_?) > u? (p?, p-?) ? e for all p'_? B-?.
Let V = W (pi, p-i). If i y trien ui (Pi, P-i) = 0 on a sufficiently small
neighborhood of /?_/, thus playing p? player / can secure payoff zero. There
fore now assume / e V, with u? (/?/, /?_/) = n? (p?, V). If / (/?/, V) < 0 then
by condition 1 player / can deviate to some action that gives him at least zero
payoffs. Now assume / (/?/, V) > 0. Since non-tied payoffs are continuous
there is 8 > 0 such that ir/ (p? ? 8) > tz\ (pi) ? e. Furthermore, since the shar
ing rule is tie-decreasing we have if/ (/?/ ? 8) > / (p?, V) ? e. If we define
B-i = Tljî (Pj - > Pj + then ui (Pi - ' P-i) = *i (Pi - 8) for all
pr_t e B-i. Therefore underbidding p? by 8 secures the payoff 7? (p?, V) ? e.
4. Since under the assumptions of the Theorem the sum of payoffs is use (see step
3 of the proof of Theorem 2) payoffs are reciprocally upper semicontinuous
(seeReny 1999, p. 1034).
5. The preceding arguments show that the assumptions of Corollary 3.3 of Reny
(1999) are satisfied, and the restricted game has a pure strategy Nash equilib
rium.
5 Conclusions
We have analyzed Bertrand games concentrating on the role of payoffs at ties, and
have allowed for asymmetric payoffs and sharing rules. Instead of invoking the
usual ad-hoc assumptions about the distribution of payoffs at ties, such as equal
quantities for all firms in the Bertrand oligopoly, we have imposed no a priori
restrictions on the sharing rule. Rather, when considering zero equilibrium payoffs

5.101.107.170 on Fri, 19 Feb 2021 21:21:24 UTC
or the existence of Nash equilibria we have invoked a few general conditions on

the sharing rule (apart from continuity conditions on non-tied payoffs).
If non-tied payoffs are asymmetric then at most one player receives positive
equilibrium payoffs if the sharing rule is strictly tie-decreasing. On the other hand,
if non-tied payoffs are symmetric then all players have zero equilibrium payoffs
if the sharing rule is weakly tie-decreasing, no matter whether it in itself is sym
metric or not. Mixed or pure strategy Nash equilibria exist when the sharing rule
is tie-decreasing, sum-upper semicontinuous and coalition-monotone (plus some
technical assumptions on non-tied payoffs such as continuity or quasi-concavity).
On a conceptual level, the mode of analysis introduced in this paper may be
fruitful for the analysis of other games with discontinuities at ties, for example
auctions or Bertrand-Edgeworth games. Furthermore, we believe that the relation
between our approach and endogenous sharing rules points to a fruitful avenue for
further research.
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Bertrand Games and Sharing Rules

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Bertrand Games and Sharing Rules

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Bertrand games and sharing rules

Author(s): Steffen H. Hoernig

Stable URL: https://www.jstor.org/stable/27822537

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