Cost uncertainty is bliss: The effect of competition on the acquisition of cost information for pricing new products

We examine the optimal acquisition of information about a common uncertain cost factor by two competing firms seeking to price a new product. We show that existing findings regarding the acquisition of demand information or the acquisition of either cost or demand information related to quantity decisions do not extend to this case. For cost information with price competition, the information acquisition strategies are strategic substitutes, even though the price decisions that are based on the information are strategic complements. Competition decreases the expected value of cost information. Moreover, when competition is intense and the cost of information low, identical firms do not acquire the same amount of cost information – even when information is free. Cost uncertainty acts like a ‘fog’ that lessens the destructive effect of price competition when products are close substitutes, and thus increases expected profits. Buyers, on the other hand, are better off when competing firms are informed about 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.