Exchange of Cost Information in Oligopoly

Carl Shapiro

The Review of Economic Studies, 1986, vol. 53, issue 3, 433-446

Abstract: When do oligopolists gain by sharing their private information about their costs with one another? What are the social welfare effects of such information exchange? I study these questions by comparing the oligopolists' expected profits under a cost sharing agreement with their expected profits in the Bayesian equilibrium that would arise without cost sharing. I also analyse the firms' decisions to form a trade association to share their cost data. Under conditions of linear demand and Cournot behaviour, industrywide information exchange is the unique point in the core of the trade association membership game. The exchange of cost data increases expected profits and welfare, but reduces expected consumer surplus. Cost sharing increases efficiency by raising the market shares of lower cost firms and reducing the variability of aggregate output. Consumer surplus is diminished, however, because the variance of output is reduced, and consumer surplus is a convex function of output.

Date: 1986
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