Interdivisional information sharing: the strategic advantage of knowing nothing

Silke Neubauer

No FS IV 97-33, Discussion Papers, Research Unit: Market Dynamics from WZB Berlin Social Science Center

Abstract: Divisional managers of multiproduct firms often only have precise information about market conditions of their own market. They may have expectations about the demand function of markets served by other divisions. When divisional profits are linked due to interrelated costs or demand parameters, it may be advantageous for a firm to provide each division with information about the other division's demand parameters. I study the incentives of owners to implement such an information structure and the value of intrafirm information sharing in a two firm - two market setting where there are interdivisional cost linkages. It is shown, that the value of bilateral information consists of a (positive) efficiency and a (negative) revenue effect, the weight of which depends on the incentive scheme used to evaluate managers. Regardless of managers' incentive scheme, owners of both firms always choose interdivisional information sharing, even if profits are lower than in a situation of noninformation.

Date: 1997
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