Date of Original Version

6-2011

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

We examine a duopolistic setting in which firms pre-announce their future competitive decisions (e.g., production quantities, capacity investments, etc.) before they actually undertake them. We show that, whether competing with substitute or complementary products, firms overstate their future actions in their pre-announcements, and choose higher real actions than the ones they would choose absent pre-announcements. If products are substitutes, firms overstate their future actions trying to preempt their rivals and, if products are complements, they do so to facilitate collusion. However, in both types of competition, we find that social welfare is maximized when the tolerance for this overstating behavior is at an intermediate level.

We also examine the equilibrium with discretionary pre-announcements and, in this analysis, we distinguish between sticky and non-sticky disclosure decisions. We find that, if firms compete with substitute products, there is a unique equilibrium in which both firms pre-announce regardless of whether disclosure decisions are sticky or not. If products are complements, however, the equilibrium is contingent on the stickiness of the disclosure decisions. If they are sticky, unless both firms have a low credibility, only the firm with the higher credibility pre-announces and the other remains silent. Nevertheless, when disclosure decisions are not sticky, both firms pre-announce in a unique equilibrium.

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