Date of Original Version

11-2008

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

When facing repeated interactions, firms in an oligopoly can engage in tacit collusion, using the threat of a price war in future periods to sustain higher prices and industry profits in the current period. This paper explores how strategic voluntary disclosures can play an important role as part of a tacit collusion. In each period, one 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. Two main forces in play are (1) nodisclosure 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, undercutting its competitors when its information is good.

Share

COinS