Dynamic Voluntary Disclosure with Endogenous Proprietary Costs

48 Pages Posted: 11 Sep 2008

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University; CAFR/SAIF

Date Written: September 10, 2008

Abstract

This paper explores corporate disclosure in a dynamic oligopoly setting. In each period, a firm receives a signal on market size and must decide whether or not to publicly disclose the information before engaging in price competition in the product market. The main insight here is that firms' disclosure choices can be used strategically to sustain higher, collusive pricing choices on the product market. Specifically, two main forces in play are (1) no-disclosure makes it easier for the oligopoly to sustain higher prices because the uninformed firms are uncertain about the market size (and therefore the benefit of deviating from collusion is lower than otherwise); and (2) disclosure makes it easier to coordinate prices if and when the oligopoly wishes to condition equilibrium prices on the market size. We find that, when firms are sufficiently patient such that monopoly prices can be sustained as an equilibrium, no-disclosure is (weakly) preferable to any other disclosure policy. Otherwise and in contrast to the static model, a simple form of partial disclosure can be optimal: the informed firm does not disclose when market size is either too high or too low but discloses for intermediate market sizes.

JEL Classification: M4, G3, L1

Suggested Citation

Bertomeu, Jeremy and Liang, Pierre Jinghong, Dynamic Voluntary Disclosure with Endogenous Proprietary Costs (September 10, 2008). Available at SSRN: https://ssrn.com/abstract=1266295 or http://dx.doi.org/10.2139/ssrn.1266295

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

CAFR/SAIF ( email )

1954 Huashan Road
Shanghai P.R.China, 200030
China

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