Monopoly, Competition and Information Acquisition

Abstract

An incumbent monopolist is uncertain about its linear demand, but can acquire information at a cost. We determine how an entry threat affects the firm's information acquisition. This effect depends on what the entrant observes about the incumbent's information choice. We consider all four possibilities: the entrant observes everything (public information); it observes how informative the incumbent's signal is, but not its realization (private information); it observes the signal, but not its informativeness (signal jamming); and it observes nothing (secret information). If returns to scale are constant, entry reduces information acquisition under public and secret information; if the equilibrium is also interior, then it has no effect under private information. If, however, the incumbent has increasing returns, then entry can increase information in each of these cases. Under signal jamming, entry can increase information acquisition even under constant returns. Finally, we show that entry can reduce expected consumer's surplus. Although entry raises output, it can also reduce information. With linear demand, consumers prefer firms to be better informed. We show that consumers can prefer a better-informed monopoly to a duopoly.