ORCID

Jeremy Bertomeu, https://orcid.org/0000-0001-6746-5767

Language

English (en)

Publication Date

5-13-2014

Abstract

This paper examines voluntary disclosures in a repeated oli gopoly and their association with price-setting behavior and industry profits along indu strial fluctuations. The analysis focuses on the collectively optimal equilibrium among olig opoly firms. We show that, in industries that are highly concentrated or feature low co st of capital, no-disclosure is prevalent and results in stable product prices and high profi t margins. Otherwise, firms may selectively disclose to soften competition in the product m arket. Under partial disclosure, firms withhold information during sharp industry expansion s or declines. Consequently, the disclosure policy dampens the dissemination of shocks t o the industry. ∗Jeremy Bertomeu ([email protected]) is from the Stan Ross Department of Ac- countancy at Baruch College and Pierre Jinghong Liang ([email protected]) is from the Tepper School of Business at Carnegie Mellon University and Chines e Academy of Financial Research (CAFR). Many thanks to Tim Baldenius, Mark Bagnoli, Ron Dye, Pingyang Gao , Jon Glover, Bjorn Jorgensen, Christian Leuz, DJ Nanda, Korok Ray, Bill Rogerson, Phil Stocken and other se minar participants at Carnegie Mellon University, Northwestern University, the D-CAF conference at Copenhag en, the LAEF conference at UC Santa Barbara and the Chicago-Minnesota Theory conference. This paper origi nated from several discussions at the Tepper Repeated Games Reading Group and we wish to thank its participants, Ed wige Cheynel, Laurens Debo and Richard Lowery for their helpful feedback on this project. Current version : May 13th, 2014. The relationship between information disclosure and produ ct market competition has been studied in prior research in single-period settings. In the se models, firms bear no adverse con- sequences in future periods from competitive actions that d ecrease the current industry profit. However, this simplifying assumption can be limiting becau se many product segments feature a small number of large firms engaged in repeated relationshi ps over an unspecified horizon. The single-period model overstates the true level of compet ition by assuming away forms of tacit cooperation that might emerge along repeated interac tions. Furthermore, such cooperation plays a special role in repeated settings: in order to surviv e in the long run, the industry as a whole must be capable to adapt to short-term fluctuations. Several facts suggest that tacit cooperation is a relativel y common phenomenon. In in- dustrial organization, it is a leading explanation for the p rice rigidity observed across a wide range of industries (Carlton (1986, 1989), Borenstein and S hepard (1996)). In practice, firms engage in various forms of cooperation with competitors suc h as, for example, sharing ad- vance production or sales information via trade associatio ns (Chandra, Procassini and Waymire (1999), Bertomeu, Evans, Feng and Wu (2013)). In most countr ies, antitrust law prohibits or- ganized price-fixing (“collusion”) but criminal law genera lly requires the existence of an overt act demonstrating conspiracy. Aside from the most egregiou s market manipulation examples1, the more widespread (and implicit) forms of cooperation do n ot meet the legal threshold for conspiracy and, thus, within reason, remain within the boun daries of the law. This paper examines the optimal disclosure policy in a dynam ic oligopoly where the threat of competition in future periods serves to discipline tacit cooperation. Our analytical framework is a variant of Rotemberg and Saloner (1986), hereafter abri dged as RS, with industry demand shocks. In this framework, firms in an oligopoly compete over an infinite horizon with time- varying industry shocks. If the industry demand shock is pub lic knowledge, RS show that firms set prices that are counter-cyclical in order to soften comp etition during industry booms. As a point of departure from RS, we assume that the demand informa tion is privately known to only 1A case at hand is the market for lysine , an additive used in meat production. This case was federall y prosecuted and settled in 1996 because executives held private meeting s to set price targets (see Hay and Kelley (1974) for other examples). 1

Document Type

Working Paper

Author's Department

Accounting

Author's School

Olin Business School

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