Incentives for Market Research: Preemption and Learning Effects∗

This paper is about the optimal entry strategy in a new product market. Some firms enter new markets by committing the sunk cost up-front and immediately investing at full scale. Other companies start out more cautiously by undertaking market research first (e.g. based on a pilot launch). In the latter case, the idea is to gain information on the demand for the offered product. One of the indirect costs of such a strategy is that it can disclose the true demand curve to the firm’s competitor(s). This paper provides a theoretical investigation of the incentives to start costly market research before entering a new market. In particular, we analyze the role of uncertainty and the cost of entry in determining the willingness to carry out the market research.