Can cost increases increase competition? Asymmetric information and equilibrium prices

Giovanni Dell'ariccia and Robert Marquez

RAND Journal of Economics, 2008, vol. 39, issue 1, 144-162

Abstract: We present an analysis of competition under asymmetric information where prices react asymmetrically to changes in firms' marginal costs. When one firm has private information about some customers, an increase in an uninformed firm's marginal cost leads to a price increase, as usual. However, an increase in the informed firm's marginal cost causes the equilibrium price to fall by improving the distribution of customers served by the uninformed firm. The model applies to settings where information asymmetries are important determinants of competition, such as credit, insurance, labor markets, or for the sale of goods where repeat business is important.

Date: 2008
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