Information Design and Sensitivity to Market Fundamentals

51 Pages Posted: 12 Aug 2020 Last revised: 27 Apr 2022

Multiple version iconThere are 2 versions of this paper

Date Written: July 4, 2020

Abstract

I study the problem of firms that disclose verifiable public information to each other before engaging in strategic interactions. In a pre-action stage of an Oligopolistic, Cournot or Bertrand, interaction, firms must design public signals that can be either interpreted as statistical reports or as slices of physical quantities, i.e. market segments. Full Disclosure enables companies to adapt to local market fundamentals at the expense of releasing crucial information to the competitors. On the other hand, Partial Revelation makes companies loose optimality of the decisions with regards to the true state of the world but enable them to commit to an aggressive policy of preclusion that increases the frequency of a favorable distribution of players actions in the Cournot case; an informational entry deterrence mechanism. Whereas Partial Revelation acts as a commitment device in the Cournot case, precluding entry in otherwise competitive markets and inducing insensitivity of the decisions with respect to local fundamentals, decentralized decision making is a dominant strategy, both in Cournot and Bertrand settings, when the profile of competitors is constant across markets or when a company cannot influence the extensive margin entry decision of the competitor by obfuscating information. Since decentralization acts as a way to correlate decisions with local market fundamentals, and running one single policy in multiple states of the world acts as a commitment device to avoid competitors, I describe a trade off between commitment over a distribution of actions versus correlation of actions with states of the world.

Keywords: Information Design, Market Power, Oligopoly

JEL Classification: D89, D43, C78

Suggested Citation

Vaissman Guinsburg, Pedro, Information Design and Sensitivity to Market Fundamentals (July 4, 2020). Available at SSRN: https://ssrn.com/abstract=3649741 or http://dx.doi.org/10.2139/ssrn.3649741

Pedro Vaissman Guinsburg (Contact Author)

affiliation not provided to SSRN

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