Is Accurate Cost Information a Double-Edged Sword in Competitive Interactions? Evidence About the Role of Cooperation with the Competitor.

Abstract:     
This study investigates experimentally how investments in accurate cost information affect profits when a competitor also has invested in such type of cost information. On the one hand, better insights in the unit costs can lead to better price-setting, higher profit margins and higher profits. In competitive interactions, however, better insights in the unit cost can instigate competitors to decrease prices until the unit cost without running a high risk of a loss. We propose that the effect of symmetry of cost information between competitors depends on the ease of cooperation between competitors, resulting in a disordinal interaction between cost information symmetry and ease of cooperation. We conduct an experiment, manipulating whether 1) competitors in a sequential duopoly have both accurate cost information or not, and 2) ease of cooperation between competitors. Consistent with our predictions, we find that the effect of cost information symmetry is moderated by the ease of cooperation between competitors. More specific, symmetry of cost information between competitors leads to higher profits when competitors can cooperate than when cooperation between competitors is hampered. Further, a detailed analysis of player’s price-setting behavior shows that leaders play a pivotal role in exploiting the positive effect of cost information symmetry. The results of this paper suggest that imitating competitors with respect to the type of cost information may have positive or negative effects, depending on whether market conditions facilitate or hamper cooperation between competitors.

Number of Pages in PDF File: 49

Keywords: cost information, competitive interactions, collusion

JEL Classification: M41

working papers series