Asymmetric Information and Exchange of Information About Product Differentiation

Abstract

We introduce asymmetric information about consumers' transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex-ante advantageous for both firms, but ex-post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation. 26 As ∂ 2 E 2 ∂ 2 p2 = − (1−θ )t H +θ tL tH tL < 0, the second order condition is always verified.