How Does Competition Affect Incentives for Market Research?

Ahmed, Rafayal and Shopp, Colin (2022): How Does Competition Affect Incentives for Market Research?

Abstract

We analyze firms’ incentives to acquire information about market demand in a differentiated goods duopoly setting. We find two distinct benefits of having better information. Firstly, with better information, each firm can better match its price to demand. This benefit is decreasing in the level of market competition. Secondly, better information allows each firm to coordinate their prices with each other in different states, and each firm can make better use of its own information if the other firm acquires better information. This benefit is inverse u-shaped in the level of competition. Based on which effect dominates, each firm’s total benefit from information can either be decreasing, or inverse u-shaped in the level of competition. Given endogenous information acquisition decisions by firms, the effect of competition on consumer welfare is ambiguous.

• Item Type: MPRA Paper
• Language: English
• Keywords: Information acquisition, Bertrand duopoly, signals, competition.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

Aghion, P., N. Bloom, R. Blundell, R. Griffith, and P. Howitt (2005): “Competition and innovation: An inverted-U relationship,” The quarterly journal of economics, 120(2), 701–728.

Goettler, R. L., and B. R. Gordon (2014): “Competition and product innovation in dynamic oligopoly,” Quantitative Marketing and Economics, 12(1), 1–42.

Hauk, E., and S. Hurkens (2001): “Secret information acquisition in Cournot markets,” Economic Theory, 18(3), 661–681.

Hwang, H.-S. (1993): “Optimal information acquisition for heterogenous duopoly firms,” Journal of Economic Theory, 59(2), 385–402.

Hwang, H.-S. (1995): “Information acquisition and relative efficiency of competitive, oligopoly and monopoly markets,” International Economic Review, pp. 325–340.

Lehmann, E. L. (1988): “Comparing Location Experiments,” The Annals of Statistics, (2), 521–533.

Milgrom, P. R., and R. J. Weber (1982): “A theory of auctions and competitive bidding,” Econometrica: Journal of the Econometric Society, pp. 1089–1122.

Persico, N. (1996): “Information acquisition in affiliated decision problems,” Discussion paper, Northwestern University.

(2000): “Information acquisition in auctions,” Econometrica, 68(1), 135–148.

Schumpeter, J. (1912): The economic theory of development. Oxford University Press.

Schumpeter, J. (1942): Socialism, capitalism and democracy. Harper and Brothers. Singh, N., and X. Vives (1984): “Price and quantity competition in a differentiated duopoly,” The Rand journal of economics, pp. 546–554.

Vives, X. (1984): “Duopoly information equilibrium: Cournot and Bertrand,” Journal of economic theory, 34(1), 71–94.

Vives, X. (1999): Oligopoly pricing: old ideas and new tools. MIT press.