Bertrand competition under cost uncertainty

The Bertrand paradox states that two firms are sufficient for perfect competition. By introducing risk-averse firms under cost uncertainty we show that this result no longer holds. If firms are required to meet demand, a price above the competitive price can be sustained even if the number of firms gets large. Furthermore, in contrast to standard oligopoly models, increasing the market size and increasing the number of firms by the same proportion will lead to an increase in price. A numerical example illustrates the results. (C) 1999 Elsevier Science B.V. All rights reserved.