Information Acquisition Behavior: An Evolutionary Game Theory Perspective

Abstract

This paper explores the retailers’ information acquisition behavior under horizontal competition and investigates the impact of information leakage from an evolutionary game theory perspective. When information leakage does not occur, we find that firms’ acquisition behavior differ under different types of competition. Under Cournot competition, rivals prefer the competitor not to acquire information. Under Bertrand competition, however, rivals prefer the competitor to acquire information. As a result, at a moderate level of acquisition cost mixed strategies (acquire and not acquire) coexist under Cournot competition, whereas all retailers adopt the same (pure) strategy under Bertrand competition. With information leakage, two effects (collaborative forecasting and free-riding) influence firms’ decision making. When the collaborative forecasting effect dominates, all retailers would choose the acquisition strategy in the equilibrium. However, if the free-riding effect is strong, no retailer would acquire information in the equilibrium. With a moderate acquisition cost, there are still retailers willing to acquire information and mixed strategies coexist, regardless of the type of competition. Interestingly, no matter information is leaked or not, we find that Cournot competition in general better accommodates information acquisition than Bertrand competition. As a result, Cournot competition can lead to a higher total welfare than Bertrand competition when the information acquisition cost is moderate and the demand uncertainty is large, in contrast to the standard result of duopoly models.