Welfare Effects of Endogenous Information Acquisition and Disclosure in Duopoly Markets

Abstract

This paper investigates the interaction between firms' information acquisition decisions and disclosure of internally acquired information in a Cournot duopoly market under demand uncertainty. The main results are as follows. When the correlation between firms' demands is positive and sufficiently high, disclosure of information on demand uncertainty can enhance social welfare, given that the quality of firms' private information is constant. However, in the setting where firms' private information is endogenously determined, mandatory disclosure is not always desirable. This is because, when disclosure is mandated, firms acquire less precise information compared with the case where the acquired information is not disclosed; hence, their internal information environments are deteriorated. This can lead to unintended consequences such that disclosure regulation decreases social welfare.     

Disclosure Policy in a Mixed Market

This paper investigates the optimal disclosure strategy for private information in a mixed duopoly market, where a state-owned enterprise (SOE) and a joint-stock company compete to supply products. I construct a model where the two firms compete in either quantity or price, and uncertainty is associated with either marginal cost or market demand. The model identifies the optimal disclosure strategies that constitute a perfect Bayesian equilibrium by type of competition and uncertainty. In Cournot competition, both firms disclose information under cost uncertainty, while only the SOE or neither firm discloses information under demand uncertainty. Alternatively, in Bertrand competition, only the joint-stock company discloses information under cost uncertainty or demand uncertainty. Recently, developed countries have required the same level of disclosure standards for SOEs as for ordinary joint-stock companies. The findings described in this paper warn that such mandatory disclosure by SOEs can trigger a reaction by joint-stock companies, putting the economy at risk of a reduction in welfare.     

Disclosure Regulation in Duopoly Markets: Proprietary Costs and Social Welfare

Abstract

The argument of proprietary costs is commonly used by firms to object against proposed disclosure regulations. The goal of this paper is to improve our understanding of the welfare consequences of disclosure in duopoly markets and to identify market settings where proprietary costs are a viable argument for firms to remain silent. We, therefore, solve the optimal disclosure strategies and distinguish two different potentially costly effects of disclosing private information: the strategic information effect and the market information effect. We identify the market settings for which a regulator prefers to impose disclosure regulation so as to maximise consumer surplus or total surplus. Regulation may be necessary because (i) the increase in welfare outweighs proprietary costs to the firms, or (ii) firms are trapped in a prisoners' dilemma. The first primarily applies to Bertrand competition with demand uncertainty and, to a lesser extent, to Cournot competition. The second applies primarily to Cournot competition and Bertrand competition with cost uncertainty.     

False modesty: When disclosing good news looks bad

Is it always wise to disclose good news? Using a new statistical dominance condition, we show that if the receiver has any private receiver information then the weakest senders with good news gain the most from boasting about it. Hence the act of disclosing good news can paradoxically make the sender look bad. Nondisclosure by some or all senders is an equilibrium if standards for the news are sufficiently easy or if prior expectations without the news are sufficiently favorable. Full disclosure is the unique equilibrium if standards are sufficiently difficult or sufficiently fine, or if prior expectations are sufficiently unfavorable. Since the sender has a legitimate fear of looking overly anxious to reveal good news, mandating that the sender disclose the news can help the sender. The model’s predictions are consistent with when faculty avoid using titles such as “Dr.” or “Professor” in voicemail greetings and course syllabi.     

Do voluntary disclosures of bad news improve liquidity?

Can managers improve market liquidity and lower the cost of capital by providing voluntary earnings guidance? This study examines the impact of profit warnings on market liquidity and finds that voluntary disclosure of bad news actually improves market liquidity. By conducting an empirical study over the period 1995–2010 on NYSE, NASDAQ and AMEX listed firms, we find that firms that issue profit warnings show enhanced market liquidity during the post-announcement period. We show that profit warnings reduce information asymmetry and lower bid-ask spreads and increase trading volumes. These results are invariant to daily (short run) and monthly (long run) data after controlling for firm specific attributes. The results have major corporate policy implications. By voluntarily disclosing negative earnings guidance by managers, firms will experience significant improvement in market liquidity, thereby lowering the cost of capital. Our results are even more profound for firms that release bad news with extremely negative stock market impact. In other words, voluntary disclosure of bad news is good for market liquidity.     

Voluntary Disclosure and Analyst Forecast

Empiricists document that firms more often voluntarily disclose bad news than good news and link this pessimism to managers’ increased incentives not to fall short of earnings expectations. This paper analyzes the voluntary disclosure of a manager’s private information by explicitly considering her incentives to meet or beat an analyst’s earnings forecast. The model predicts that managers who face strong incentives to meet or beat these forecasts more frequently disclose bad news than good news in order to guide analysts’ expectations about future earnings downward. This pessimism is higher in markets with less informed managers and may hold even if the manager has strong incentives for high stock prices and meet-or-beat incentives are comparably low.     

第三方信息提供者对公司自愿披露博弈影响研究

本文通过构建一个信息不对称的古诺双寡头产量竞争模型,研究第三方信息提供者对上市公司自愿披露行为的影响。结果发现:随着第三方信息提供者的增多,为了引导其羊群行为,控制流向竞争者的信息,保持竞争优势,即使私人成本较高,上市公司也将自愿披露其私人信息。     

Convergence to Walrasian equilibrium with minimal information

We consider convergence to Walrasian equilibrium in a situation where firms know only market price and their own cost function. We term this a situation of minimal information. We model the problem as a large population game of Cournot competition. The Nash equilibrium of this model is identical to the Walrasian equilibrium. We apply the best response (BR) dynamic as our main evolutionary model. This dynamic can be applied under minimal information as firms need to know only the market price and the their own cost to compute payoffs. We show that the BR dynamic converges globally to Nash equilibrium in an aggregative game like the Cournot model. Hence, it converges globally to the Walrasian equilibrium under minimal information. We extend the result to some other evolutionary dynamics using the method of potential games.

     

定期报告预约披露日期的信息含量

沪深两交易所从2002年初开始对外公布上市公司向其预约的定期报告披露日期,本文研究了这一日期是否包含对投资者有用的信息。我们发现,在交易所公布预约日期时,公司的预约披露日期越早,则其异常回报越高,反之则低。市场的这种反应可以用随后公布的实际会计业绩好坏加以解释。我们还考察了市场的这种反应在横截面上的差异,对发布过”好消息”的预警公告及规模较大的公司,市场的反应程度较低;同时还发现预约披露日期的信息含量并未被”坏消息”的业绩预警公告所取代,这说明预约披露日期对“坏消息”的预警公司起到了进一步的证实作用。     

Manufacturer product quality information disclosure with channel encroachment in the E-commerce age

This study investigates the interplay between a manufacturer's quality disclosure and channel encroachment. We show that there exists a U-shaped pattern between the manufacturer's payoff and the disclosure cost, whereas the retailer's payoff exhibits a more complicated and nonmonotonic relationship with respect to the disclosure cost. Both firms may benefit from the increase of the disclosure cost when it falls into the intermediate range and when the channel substitution rate is not too low. The increase of the encroachment cost always hurts the manufacturer, and it may even hurt the retailer if it is medium and if the channel substitution rate is low.     

基于成本差异的最佳贸易与产业政策选择

本文讨论了存在成本差异的第三国市场模型的最佳贸易与产业政策选择问题，讨论了社会成本和私人成本、本国和外国成本差异情况下的Cournot竞争和Bertrand竞争的情况。本文发现，在Cournot竞争下，政府首先行动时，当政府基金影子价格低于4／3时，政府对出口进行补贴，并且本国越有成本优势，补贴越高，补贴的利润转移效应越大；当政府基金影子价格高于4／3时，政府对出口征收出口税，且本国越有成本优势，征税越多。在Bertrand竞争下，当政府先行动时，对出口征收出口税；当政府后行动时，对出口进行补贴。当本国企业具有劣势时，事后补贴是最佳政蓑。     

Endogenous vertical structure and trade policy in an import-competing market

We examine the endogenous determination of a vertical market in an import-competing market with import tariff. We show that if firms commit to vertical organization before the government's commitment to trade policy, the home and foreign firms choose vertical separation and vertical integration, respectively, at equilibrium under Bertrand competition. Under Cournot competition, the subgame perfect Nash equilibrium entails both firms separating their retailers. Comparing profits between Bertrand competition to Cournot competition, we find that upstream manufacturer's profit can be higher under Bertrand competition with integration than under Cournot competition with separation when comparing foreign upstream manufacturer's profit.     

Quantity precommitment and price-matching

We study the effects of price-matching in a capacity-constrained duopoly setting. We show that no firm does worse at any pure equilibrium under price-matching relative to Bertrand, but as capacity increases, one or both firms do better relative to Bertrand. If the firms choose their capacities simultaneously before making pricing decisions, then the effect of price-matching varies with the cost of capacity. Specifically, when the cost is “high” price-matching either (i) has no effect on the market price, i.e., the market price associated with the pure SPEs is the Cournot one, or (ii) weakly decreases the market price relative to Cournot. Furthermore, when the cost is “low” price-matching leads to a set of (pure) SPE prices that includes the Cournot price in the interior. Therefore, price-matching does not necessarily benefit the firms when firms select their capacities before competing in price.     

Differentiated Duopoly with Asymmetric Costs

In this paper, we compare Bertrand and Cournot equilibria in a differentiated duopoly with linear demand and cost functions. We extend the Singh and Vives (1984) model by allowing for a wider range of cost and demand (product quality) asymmetry between firms. Focusing on the case of substitute goods, we show that both the efficient firm's profits and industry profits are higher under Bertrand competition when asymmetry is strong and/or products are weakly differentiated. Therefore, Singh and Vives's ranking of profits between the two modes of competition is reversed in a sizeable portion of the relevant parameter space. Contrary to the standard result with symmetric firms, we also show that product differentiation can reduce both the efficient firm's and industry profits, implying that a local incentive towards less differentiation may arise.     

Managerial overconfidence,overinvestment, and R&D spillover

This paper examines whether a firm will select an overoptimistic manager when a cost‐reduction investment has a spillover effect. We consider a Cournot competition model where R&D investment ex ante occurs before the process of product market competition. Our analysis reveals that there exists a unique and symmetric equilibrium for firms to delegate overoptimistic managers. We show that only when the spillover effect is sufficiently high do firms benefit from delegation. Furthermore, the equilibrium confidence level and investment decision first decrease and then increase as the spillover parameter changes. As the initial production cost increases, the equilibrium performance becomes worse.     

Risk reporting and stock return in the UK: Does market competition Matter?

This study examines the extent to which market competition influences risk reporting practice. It also explores how market competition affects the usefulness of risk reporting. The automated textual analysis measures the level of risk reporting [how much to report] and its tone [how it is reported] of UK FTSE 350 firms. The abnormal stock return is used as a proxy for the usefulness of risk reporting. In contrast to the proprietary cost hypothesis, our results indicate that the level of risk reporting is a positive function of market competition. Besides, UK firms are likely to disseminate more (less) negative (positive) news about their risks when market competition increases. However, after examining the informativeness of this reporting, we provide evidence that the level of reported risk information does not significantly enhance the abnormal stock returns of UK firms. Nevertheless, the tone of the reported risks carries incremental information indicative of a firm’s abnormal stock return, especially when market competition decreases. The findings suggest that firms are likely to alleviate their proprietary costs by framing their reporting of risk information in a way that deters potential competitors from entering their market and that market competition diminishes the perceived informativeness of such reporting. The results provide implications for investors as they should not acknowledge the disclosure of higher risk information when asking for more corporate transparency, as it lacks informativeness. Besides, policymakers may impose extra compulsory requirements on the UK firms to avoid reporting overly optimistic risk news to protect investors and avoid the adverse effects of this reporting.     

Spatial discrimination: Bertrand vs. Cournot with asymmetric demands

This paper develops a barbell model a la Hwang and Mai [Hwang, H., and C.C. Mai, 1990, Effects of spatial price discrimination on output, welfare, and location, American Economic Review 80, 567–575.] with homogeneous product and asymmetric demands to compare prices, aggregate profits and social welfare between Cournot and Bertrand competition, and to analyze the firms' equilibrium locations. It focuses on the impacts of the spatial barrier generated from transport costs, and the market size effect resulting from asymmetric demands. It shows that the market-size effect is crucial in determining firms' locations under Cournot competition, but insignificant under Bertrand competition. Moreover, the equilibrium price of the large market and the aggregate profits are lower but the social welfare is higher under Cournot competition than under Bertrand competition if one of the markets is sufficiently large and the transport cost is high.     

Robust results on the sharing of firm-specific information: Incentives and welfare effects

Contrary to much of the existing literature, we obtain robust and clear-cut results for the incentives and welfare effects of information sharing when information is firm-specific. We show that firms’ incentives to share this type of information are aligned with social welfare. Whenever revealing information is the dominant strategy (such as for Cournot firms revealing costs or Cournot and Bertrand firms revealing demand), it is socially beneficial. Only cost information in Bertrand competition will not be revealed but this is socially desirable, too. These findings are independent of distributional assumptions on random shocks and signals and hold for general asymmetric oligopoly with any mixture of substitute, complementary and independent goods.     

Litigation Risk and Corporate Voluntary Disclosure: Evidence from Two Quasi-Natural Experiments

Abstract

We examine the effect of litigation risk on corporate voluntary disclosure using two quasi-natural experiments, which have substantial and opposing impacts on the litigation risk of firms headquartered in the Ninth Circuit. We find that firms in the Ninth Circuit decrease (increase) the quantity and quality of their voluntary disclosure, relative to control firms, when their litigation risk is lowered (elevated). The pre-treatment test shows an indistinguishable trend between treatment and control firms. A battery of robustness checks indicates that our results are not driven by alternative explanations. We hypothesize and find that the impact of litigation risk is more pronounced when firms have bad news and that firms are more likely to preempt bad news through voluntary disclosures when litigation risk is elevated. Overall, results from both experiments suggest that litigation risk causally increases corporate voluntary disclosure.     

Endogenous codetermination

This research introduces endogenous codetermination in a Cournot duopoly. Unlike the received literature (Kraft, 1998), this work assumes that firms bargain with their own union bargaining units under codetermination if and only if they can choose an ad hoc bargaining effort by maximising profits (three-stage non-cooperative game). There are remarkable differences compared with the main findings of the exogenous codetermination literature. Indeed, there may exist asymmetric multiple (Pareto efficient) Nash equilibria in pure strategies. Mandatory codetermination, therefore, is Pareto worsening. Each firm can then use the union bargaining power as a strategic device in a Cournot setting.