Induced Price Leadership and (Counter-)Spying Rivals' Play Under Incomplete Information

Abstract

We analyze spying out a rival’s price in a Bertrand market game with incomplete information. Spying transforms a simultaneous into a robust sequential moves game. We provide conditions for profitable espionage. The spied at firm may attempt to immunize against spying by delaying its pricing decision if its cost is low. This, however, adversely affects beliefs and becomes self-defeating. The spy may also be a counterspy or be fooled to report strategically distorted information. This gives rise to an intriguing signaling problem that admits only partially separating equilibria. Surprisingly, counter-espionage may aggravate the price leadership induced by spying. Altogether, our analysis offers an explanation and generalization of robust Stackelberg-Bertrand games.

Keywords: industrial espionage, price leadership, Stackelberg games, collusion, antitrust policy, incomplete information

JEL Classification: L120, L130, L410, D430, D820