Bertrand Market Games with Espionage under Incomplete Information

Abstract

We analyze the effect of espionage on pricing in a Bertrand market with substitutes. We explain why incomplete information is essential for a robust espionage equilibrium. Yet, under incomplete information espionage is not always profitable (the second-mover advantage may vanish) and we provide sufficient conditions for profitable espionage. Moreover, while the spied at firm suffers from espionage if its cost is low, firing the spy, which is an option if the spy has been exposed, adversely affects beliefs and never pays. Unlike the literature on espionage in entry games that relies on mixed strategies and complete information, the introduction of incomplete information allows us to focus on pure strategies.