An Efficient Market Mechanism with Endogenous Information Acquisition: Cournot Oligopoly Case

Abstract

The question of how an efficient competitive equilibrium could be reached through a pricing mechanism in which the information acquisition is endogenously determined is addressed. The traditional oligopoly market is extended to include an ex ante information market when there is uncertainty either in the cost function or the demand function. Equilibrium behavior is characterized in a two-stage noncooperative game involving n production firms and m research firms in the industry. As the environment becomes more competitive, meaning, both the information market and the tangible good market become large, the equilibrium random price of the product converges almost surely to its competitive price level with certainty and consequently the total social welfare (consumer plus producer surplus) is maximized.