© 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd /University of Adelaide and Flinders University Blackwell Publishing Asia Melbourne, Australia AEPA Australian Economic Papers 0004-900X 1467-8454 © Blackwell Publishing Ltd/University of Adelaide and Flinders University of South Australia 2008 XXX ORIGINAL ARTICLE SIMULTANEOUS PRICE CHANGES, INFORMATION ACQUISITION ON COMMON COMPETITORS, AND WELFARE XX SIMULTANEOUS PRICE CHANGES, INFORMATION ACQUISITION ON COMMON COMPETITORS AND WELFARE* MINORU KITAHARA Tokyo Metropolitan University TOSHIHIRO MATSUMURA University of Tokyo We investigate a model where two firms choose whether to acquire information on a common com- petitor. We find that strategic complementarity on information acquisition exists, yielding multiple equilibria. In addition, we investigate welfare implication of information acquisition. We find that information acquisition reduces both consumer surplus and the total profits of the firms. I. I ntroduction Simultaneous price increases by oligopolists are often related to tacit collusion. In some countries, simultaneous price increases are considered to be indirect evidence of tacit collusion and antitrust departments intensively monitor such behaviour. For example, in Japan, the antitrust department often investigates this type of behaviour thoroughly and impels firms to cancel price rises if it finds some evidence of conspiracy. Obviously, a simultaneous price change does not always imply tacit collusion. Changes in common costs induce simultaneous price increases without any conspiracy. Even idiosyncratic shocks to one specific firm can induce simultaneous price raises through strategic interaction. In this paper, we examine this strategic interaction and analyse the welfare implications of a positive correlation of firms’ prices. We investigate information acquisition by two firms that do not compete directly. Instead, they compete with a common rival. The two firms choose whether to acquire information on the common rival’s cost and then engage in a price-setting competition. 1 If both firms acquire the information in the first stage, there will be a significant positive correlation between the prices of the three firms because of the strategic interaction in the second stage. We find that the strategic complementarity appears in the information acquisition stage, resulting in the multiple equilibria. One firm’s acquisition of information increases the other firm’s incentive for information acquisition. In the equilibrium where both firms acquire informa- tion, simultaneous price rises take place even though there is no increase in the common costs doi: 10.1111/j.1467-8454.2008.00356.x Correspondence: Minoru Kitahara, Faculty of Urban Liberal Arts, Tokyo Metropolitan University, 1-1 Minami Osawa, Hachioji-shi, Tokyo 192-0397, Japan. mkitahar@tmu.ac.jp * We are indebted to an anonymous referee and the editor for their valuable and constructive suggestions. Needless to say, we are responsible for any remaining errors. The financial supports from the Japan Securities Scholarship Foundation, the JSPS, and the MEXT are greatly appreciated. 1 For cases with direct or quantity-setting competition under demand uncertainty, see Sasaki (2001) and Hauk and Hurkens (2001).