Industrial Espionage in Duopoly Games

Abstract

In the context of a duopoly market, firms can learn about unobservable demand from two sources: conducting market research, and spying on their competitor's market research results. In the unique linear equilibrium firms pick an action which is a weighted average of the market research signal and the espionage signal. A firm's preferred information source depends on its technological advantage over the competitor (in terms of spying precision), and on the degree of differentiation between their products. If the former is larger than the latter, the firm trusts its espionage more than its market research (i.e. places a larger weight on the respective signal), and vice versa. Spying under price competition is shown to be beneficial for the industry: aggregate profit increases as the precision of the spying device improves. The same is true under quantity competition if and only if the espionage technology is already more accurate than the alternative market research technology.

Keywords: Industrial Espionage, Coordination Games, Duopoly, Information Acquisition

JEL Classification: C72, D43, D83, L13