Screening Competition under Flexible Information Acquisition

Abstract

This paper studies screening competition under flexible information acquisition and its interaction with price competition. Multiple homogeneous buyers play a game where they simultaneously design independent exams with pre-specified information limit on a binary-type seller. Once observing own exam's outcome, a buyer may choose to bid for the object. This paper shows that under general assumptions on information cost, binary-signal symmetric equilibrium exists and must be supported by mixed strategies. Moreover, equilibrium is inefficient and on average buyers over-reject the seller. Price regulation may help restore efficiency.