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Bertrand Competition, Market Information and Observability

Recent economics literature shows renewed interest in models of Bertrand competition with cost uncertainty. We continue this reexamination and introduce cost correlation as a way to mitigate the asymmetry of information between firms facing Bertrand competition. We also allow firms to make an investment to decrease the variance of their cost signals. Our results demonstrate that when the firms’ choices of precision of their cost signals are observable, all firms will choose to be uninformed about their marginal costs and price at the average equilibrium price. On the other hand, with unobservable choices of precision, firms will choose as precise information as possible within the cost-benefit trade-off. Because of the correlation between the firms’ marginal costs, the increased precision of the cost signals not only provides better information about a firm’s own cost but also allows the firm to better infer the rivals’ costs and better anticipate their pricing choices.