We study firms’ information acquisition decisions in the presence of cost uncertainty and signaling incentives. In a duopoly model with differentiated products, firms compete in price in two periods. Before production starts, each firm faces uncertainty on its own cost and can make a costly investment to receive some private information about it. In the first period, firms have incentives to signal their private information through prices in order to manipulate their rivals’ beliefs and soften the second- period competition. Although firms benefit from more accurate private information, the “signaling” incentives dampen firms’ gain from improved information. That is, compared with myopic firms who do not try to manipulate their rivals’ beliefs, strategic firms will acquire more noisy private information.

From the perspective of industry profit, firms acquire too little information because they fail to internalize the positive externality of their improved information on their rivals’ profits. When the two goods are close substitutes, firms’ improved information exerts a negative impact on consumer surplus. If the degree of substitution between the goods is low, consumers also benefit from more accurate private information possessed by the firms. Overall, form the social planner’s point of view, the qualities of firms’ information are inefficiently low.