Optimal Research for Cournot Oligopolists

We extend the classical Cournot model to take account of uncertainty in either the cost function or the demand function. By undertaking research, firms can acquire private (asymmetric) information to help resolve their uncertainty and make a more informed production decision. The model is a two stage game: in the first stage research levels are chosen, and in the second stage, conditional on private research outcomes, production decisions are made. We find that for a linear, continuous information structure there is a unique Nash equilibrium to the game. In the equilibrium there may be an inefficient amount of aggregate research and there may be incomplete pooling as well. The model specializes to the classical case when the cost of research is zero (and each firm gains essentially the same information by doing an infinite amount of research) or when the cost of research is so high no firm undertakes research.