Competitive Intelligence and Disclosure of Cost Information in Duopoly

Abstract

This paper considers a duopoly in which one firm doesn’t know its rival’s realized cost but can invest in competitive intelligence (CI) to gather information before competition. The incentive to invest in CI and the net benefit from CI investment are higher under Bertrand competition than under Cournot competition. Ex ante, both the firm that is being spied upon and the industry benefit (suffer) from a rival’s CI investment under Cournot (Bertrand) competition while consumer surplus suffers under both types of competition. Overall, CI investment increases (reduces) social welfare when firms compete a la Cournot (Bertrand). Ex post disclosure of cost information that is acquired may either increase or decrease the incentive to invest in CI but does not affect the qualitative results with respect to profit and welfare analyses.