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Cost uncertainty is bliss: the effect of competition on the acquisition of cost information for pricing new products (RV of 2001/50/MKT)

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For competing firms, the author examines the optimal acquisition of information about a common uncertain cost factor to price a new product and the implications of this acquisition for different parties. The author shows that findings for the acquisition of demand information or the acquisition of either cost or demand information for quantity decisions do not extend to this case. For cost information with price competition, the acquisition strategies are strategic substitutes even though the price decisions that are based on the information are strategic complements. Moreover, when the cost of information is low, identical firms acquire different amounts of cost information. Even when information is free, only one firm acquires perfect cost information. In fact, firms should accept (some) cost uncertainty because it acts like a 'fog' that lessens the destructive effect of price competition when products are close substitutes. Conversely, buyers have an incentive to help firms obtain better cost estimates because expected customer surplus is highest when competing firms are informed about their cost. Even though the expected value of cost information strictly decreases with competition, the optimal price for industry-specific cost information set by an information vendor increases with competition when the firms' products are sufficiently substitutable.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2004/2004-40.pdf

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Copyright INSEAD. All rights reserved