An Experimental Investigation of the Impact of Information on Competitive Decision Making

It is found that relative to the availability of competitive information, access to a decision aid has a larger effect on lowering prices and profits, and that in two-firm markets, price competition is even more intense than in five-firms markets.

Abstract

Managers often employ market response models as decision aids and historical information of competitors' market outcomes to aid their competitive decisions in oligopolistic settings. However, little is known about how access to a decision aid or the availability of competitors' market outcomes impact a firm's competitive decisions (e.g., prices) or market outcomes resulting from those decisions (e.g., profits), or how managers make these decisions across such informational conditions. Hence, the objective of this paper is twofold. First, we investigate whether access to a decision aid and historical information of competitors' outcomes yields more- or less-competitive decisions and outcomes. Second, we determine which learning constructs, such as choice reinforcement and beliefs about projected profits, best explain competitive actions across various information conditions. We find that relative to the availability of competitive information, access to a decision aid has a larger effect on lowering prices and profits. We also find that in two-firm markets, price competition is even more intense than in five-firm markets. Similarly, the availability of market share information leads to more aggressive pricing even when profits are held constant. Finally, we outline the implications of our findings in making managerial resource allocations to market research endeavors.