Can More Information About Rivals' Costs Decrease Welfare?

Abstract

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.