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The Incentive of Cournot Duopolists to Reveal Cost Information After Costs are Realized

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  • Lowell Johnson

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    (Rutgers)

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    Abstract

    This is a study of the incentive of firms to disclose private information about their costs to competitors (when firms compete by setting quantitites). This paper expands on previous contributions by analyzing a model in which firms decide whether to disclose their cost information to their rivals after they observe their own costs. I calculate the levels of profit to the firm, the benefit to the consumers, and welfare to society when competitors do not disclose such information, when a firm unilaterally discloses provate cost information to its competitor and when firms exchange such information. The results show that risk-neutral Cournot competitors have an incentive to disclose firm-specific cost information ex post if their costs are below the expected mean cost. Disclosure reduces consumer surplus when the disclosing firm's costs are below the expected mean cost. The effect of disclosure on social welfare depends on the parameters of the problem. Finally, I analyze the incentive of firms to agree to exchange information when disclosure exposes a firm to the risk of antitrust liability.

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    Bibliographic Info

    Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199704.

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    Date of creation: 08 Apr 1997
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    Handle: RePEc:rut:rutres:199704

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    Keywords: antitrust; Cournot; Disclosure; private information;

    References

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    1. Gal-Or, Esther, 1986. "Information Transmission-Cournot and Bertrand Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 85-92, January.
    2. Shapiro, Carl, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 433-46, July.
    3. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
    4. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
    5. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    6. Kao, Jennifer L & Hughes, John S, 1993. "Note on Risk Aversion and Sharing of Firm-Specific Information in Duopolies," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 103-12, March.
    7. Alison J. Kirby, 1988. "Trade Associations as Information Exchange Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 138-146, Spring.
    8. Fried, Dov, 1984. "Incentives for Information Production and Disclosure in a Duopolistic Environment," The Quarterly Journal of Economics, MIT Press, vol. 99(2), pages 367-81, May.
    9. Block, Michael Kent & Nold, Frederick Carl, 1981. "The Deterrent Effect of Antitrust Enforcement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 429-45, June.
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