Bluffing Contests: The Real Effects of Pre-Announcing Competitive Decisions

39 Pages Posted: 19 Aug 2010 Last revised: 15 Sep 2010

See all articles by Carlos Corona

Carlos Corona

Carnegie Mellon University - David A. Tepper School of Business

Lin Nan

Purdue University

Date Written: August 17, 2010

Abstract

We examine a duopolistic setting in which firms pre-announce their future competitive decisions (e.g. prices, production quantities, capacity investments) before they actually undertake them. We show that firms overstate their future actions in their pre-announcements, and that their real action levels are higher than the ones they would choose absent pre-announcements. In addition, we show that, the equilibrium real actions and welfare in Cournot competition reach a maximum value when pre-announcements are intermediately credible, whereas, actions are maximized and welfare minimized at that same credibility level in Bertrand competition.

We also examine the equilibrium with discretionary pre-announcements. We find that, in Cournot competition, there is a unique equilibrium in which both firms pre-announce regardless of whether disclosure policies are observable or not. In Bertrand competition, however, the equilibrium is contingent on the observability of the disclosure policies. If they are observable, unless both firms have a low credibility, only the firm with the higher credibility pre-announces and the other remains silent. Nevertheless, when disclosure policies are not observable, both firms pre-announce in a unique equilibrium.

Keywords: Disclosure, Oligopoly, Duopoly, Pre-Announcement, Bias, Bluffing, Credibility, Discretionary, Stackelberg

JEL Classification: C7, C72, D43, M4, M40, M41, M49

Suggested Citation

Corona, Carlos and Nan, Lin, Bluffing Contests: The Real Effects of Pre-Announcing Competitive Decisions (August 17, 2010). Available at SSRN: https://ssrn.com/abstract=1661729 or http://dx.doi.org/10.2139/ssrn.1661729

Carlos Corona (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Lin Nan

Purdue University ( email )

100 S Grant St
West Lafayette, IN 47907
United States
7654960551 (Phone)

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