Can More Information About Rivals' Costs Decrease Welfare?
19 Pages Posted: 25 Feb 2016
Date Written: March 2016
We investigate if more information about rivals' costs increases welfare when firms compete in prices and cost‐reducing investment. When firms compete only in prices, a firm sets a higher price under partial information than under complete information if it faces an efficient rival, and a lower price otherwise. Thus, more information redistributes market share from the more efficient to the less efficient firm, with a negative impact on welfare. When firms also compete in cost‐reducing investment, more information leads a firm to decrease investment if it faces an efficient rival, and to increase investment otherwise. Welfare decreases if firms are sufficiently asymmetric and their products sufficiently differentiated.
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