Working Papers, Department of Economics, Rutgers, The State University of New Jersey 1997-04
This is a study of the incentive of firms to disclose private information about their costs to competitors (when firms compete by setting quantitites). This paper expands on previous contributions by analyzing a model in which firms decide whether to disclose their cost information to their rivals after they observe their own costs. I calculate the levels of profit to the firm, the benefit to the consumers, and welfare to society when competitors do not disclose such information, when a firm unilaterally discloses provate cost information to its competitor and when firms exchange such information. The results show that risk-neutral Cournot competitors have an incentive to disclose firm-specific cost information ex post if their costs are below the expected mean cost. Disclosure reduces consumer surplus when the disclosing firm's costs are below the expected mean cost. The effect of disclosure on social welfare depends on the parameters of the problem. Finally, I analyze the incentive of firms to agree to exchange information when disclosure exposes a firm to the risk of antitrust liability.