Business Intelligence and Multimarket Competition

• Author: SUBHADIP CHAKRABARTI,SUDIPTA SARANGI,CHRISTOPHE BRAVARD,PASCAL BILLAND
• DOI: http://doi.org/10.1111/jpet.12180
• Date: 01 April 2016
• Published date: 01 April 2016

BUSINESS INTELLIGENCE AND MULTIMARKET COMPETITION

PASCAL BILLAND

Universit´

edeLyon

CHRISTOPHE BRAVARD

Universit´

e Grenoble 2

SUBHADIP CHAKRABARTI

Queen’s University Belfast

SUDIPTA SARANGI

DIW Berlin and Virginia Tech

Abstract

We consider a multimarket framework where a set of firms compete

on two oligopolistic markets. The cost of production of each firm al-

lows for spillovers across markets, ensuring that output decisions for

both markets have to be made jointly. Prior to competing in these mar-

kets, firms can establish business intelligence gathering links with other

firms. A link formed by a firm generates two types of externalities for

competitors and consumers. We characterize the business intelligence

equilibrium networks and networks that maximize social welfare. By

contrast with single-market competition, we show that in multimarket

competition there exist situations where intelligence-gathering activi-

ties are underdeveloped with regard to social welfare and should be

tolerated, if not encouraged, by public authorities.

1. Introduction

Firms routinely collect and make use of business information about their rivals. With

increasing competition at the global level, modern firms keep tabs on each other by

engaging in competitive intelligence gathering activities. Competitive intelligence is

the name given to the systematic and ethical approach for gathering, analyzing, and

Pascal Billand, Universit´

e de Lyon, Lyon F-69003, France; F-42000, France; CNRS, GATE Lyon Saint-

Etienne, Saint-Etienne, F-42000, France (pascal.billand@univ-st-etienne.fr). Christophe Bravard, Uni-

versit´

e Grenoble 2, UMR 1215 GAEL, F-38000 Grenoble, France, CNRS, GATE Lyon Saint-Etienne, F-

42000, France (christophe.bravard@univ-st-etienne.fr). Subhadip Chakrabarti, Queen’s Management

School, Queen’s University Belfast, Northern Ireland, United Kingdom (s.chakrabarti@qub.ac.uk).

Sudipta Sarangi, DIW Berlin and Department of Economics, Virginia Tech Blacksburg VA 24061-0316

(ssarangi@vt.edu).

This work is part of the project RENEWAL funded by the ANR, French National Research Agency.We

thank the editor Myrna Wooders, and an anonymous referee, for providing several useful comments.

We wish to thank S. Berninghaus, W. Guth, and H. Haller for helpful suggestions. We also thank the

seminar participants at Cambridge University and DIW Berlin for useful comments.

Received May 3, 2013; Accepted June 10, 2015.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (2), 2016, pp. 248–267.

248

Business Intelligence and Multimarket Competition 249

managing information that can affect a firm’s plans, decisions, and operations. In 2002

for instance, Business Week reported that 90% of large companies have competitive intel-

ligence staff, and many large US firms spend more than $1 million annually on compet-

itive intelligence. Moreover, several major multinational firms like GM, Kodak, and BP

have their own separate competitive intelligence units. The American Society of Indus-

trial Security (ASIS) released a survey stating that economic espionage grew by 323%

between 1992 and 1996. In fact realizing the magnitude of this problem, in 1996 the US

Congress passed the Economic Espionage Act, and by 2005 the US Department of Justice

was engaged in prosecuting 45 cases under this act.

Our reading of the literature in this area as well as the popular press provides a

number of stylized facts. First, intelligence gathering whether legal or illegal is a growing

problem that needs to be studied. Second, although it is more prevalent in high-tech

industries, the pharmaceutical industry, and the defense-related sector, it is also becom-

ing more important for other industries.1Typically in these industries, corporations are

involved in producing more than one product, often with interrelated costs. This cre-

ates spillover effects across markets, which may be positive and are often due to excess

capacity of some sort called economies of scope. Negative spillovers called diseconomies

of scope are not as frequent but can still be found in several industries where business

intelligence is important, like the pharmaceutical industry (see for instance Okunade

2001; Macher and Boerner 2006), the banking industry (Berger, Hanweck, and

Humphrey 1987), and the IT industry (Bresnahan, Greenstein, and Henderson 2012).

The reasons for diseconomies of scope in different industries are different. For instance,

Bresnahan et al. (2011) show from the histories of Microsoft and IBM that diseconomies

are rooted in the need to share key firm level assets. When the features of the shared

assets that is desirable for each business are distinct, sharing creates diseconomies of

scope. Using a data set from the pharmaceutical industry, Macher and Boerner (2006)

find that contract research organizations (CROs) who participate in many (possibly

unrelated) pharmaceutical areas achieve worse performance in comparison to those

in fewer pharmaceutical areas. The authors argue that technological area diversity

may overextend or limit CROs’ abilities to usefully apply new knowledge to other

technological areas. The third stylized fact is that firms are aware that their competitors

are attempting to obtain information about them, and that their competitiveness will be

negatively affected by the information obtained. However, despite protective measures,

rival firms are often able to engage in intelligence gathering successfully.

Our paper focuses on how intelligence gathering links between competitors in mul-

timarket oligopolies generate externalities and have an impact on firms’ behavior and

social welfare. We model the spying behavior of firms as a two-stage game: in the first

stage, firms establish (directed) links with competitors to obtain information about the

characteristics of rivals’ products. In the second stage, firms engage in a multimarket

Cournot competition. The information obtained by firm ithrough its link with firm j

has a positive impact on firm i’s competitiveness in the market since it allows firm ito

incorporate some valuable characteristics of firm j’s product in its own product. How-

ever, this link can have a negative externality on firm j’s competitiveness in the market.

One way to think about this is that, due to its intelligence link with firm j,firmiknows

additional technical weaknesses of the good produced by jand is able to spread this

negative information. Consequently the quality of the good of firm j, as perceived by

1A particularly interesting case in the United States was Procter and Gamble’s attempt to find out more

about Unilever’s hair care business by going through their garbage bins (Crane 2005).