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Incentive to Reduce Cost under Incomplete Information

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  • Aditi Sengupta

Abstract

I examine how ex ante symmetric firms that compete in prices strategically decide to invest in research and development of cost-reducing technology when the rival firm and the consumers are not aware of the actual outcome of the investment. I also compare the strategic incentive to invest and market outcomes under incomplete information with that of the full information. I find that equilibrium investment under incomplete information with unobservable investment is same as that of (symmetric) full information equilibrium and is also socially optimal.

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File URL: http://cla.auburn.edu/econwp/Archives/2013/2013-10.pdf
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Bibliographic Info

Paper provided by Department of Economics, Auburn University in its series Auburn Economics Working Paper Series with number auwp2013-10.

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Date of creation: Aug 2013
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Handle: RePEc:abn:wpaper:auwp2013-10

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Keywords: Cost-reducing technology; Duopoly; Incomplete information; Price competition; Strategic investment;

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  1. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
  2. Routledge, Robert R., 2010. "Bertrand competition with cost uncertainty," Economics Letters, Elsevier, vol. 107(3), pages 356-359, June.
  3. Thomas, Charles J., 1997. "Disincentives for cost-reducing investment," Economics Letters, Elsevier, vol. 57(3), pages 359-363, December.
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