Industry Costs and Research Aggregation in Dynamic Competition
Abstract: We study information acquisition and subsequent price competition in an environment where the cost of each firm is initially unknown and composed of two components, private costs specific to the firm and costs common to all firms in the industry. In this setting, firms choose high initial prices to soften future competition. Moreover, this pricing distortion is exacerbated when firms only possess private information about firm specific costs. This implies that sharing information about industry relevant costs, such as aggregating cost information through a trade association, will lead to higher prices. Additionally, when firms share information about common costs they have less incentive to acquire information about firm specific costs which can lead to lower expected profits for firms.