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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.

Suggested Citation

  • Aditi Sengupta, 2013. "Incentive to Reduce Cost under Incomplete Information," Auburn Economics Working Paper Series auwp2013-10, Department of Economics, Auburn University.
  • Handle: RePEc:abn:wpaper:auwp2013-10
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    File URL: http://cla.auburn.edu/econwp/Archives/2013/2013-10.pdf
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    References listed on IDEAS

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    1. Thomas, Charles J., 1997. "Disincentives for cost-reducing investment," Economics Letters, Elsevier, vol. 57(3), pages 359-363, December.
    2. Jos Jansen, 2010. "STRATEGIC INFORMATION DISCLOSURE AND COMPETITION FOR AN IMPERFECTLY PROTECTED INNOVATION -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 349-372, June.
    3. Routledge, Robert R., 2010. "Bertrand competition with cost uncertainty," Economics Letters, Elsevier, vol. 107(3), pages 356-359, June.
    4. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
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    More about this item

    Keywords

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

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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