Information Value Under Demand Uncertainty and Endogenous Market Leadership

Abstract

In an oligopoly model with firms choosing to produce in one of two periods, we identify the circumstance under which a firm's having early information regarding stochastic demand results in market leadership. High demand volatility leads to Stackelberg competition with the information-advantaged firm leading. In the N-firm case an equilibrium with multiple leaders and multiple followers emerges endogenously. In a duopoly information acquisition game we identify conditions that determine whether neither, one, or both firms will pay to acquire early information and note that one firm's obtaining early information may generate a positive externality benefitting its competitor. Both symmetric and asymmetric outcomes are possible and Stackelberg market leadership may occur in equilibrium, but only when firms have different costs of information. Our finding that an information advantage may convey leadership which then affects the value of information to the players applies to other settings exhibiting first-mover advantage such as certain public good provision games. (JEL C72, D82, L13)

Endogenous Price Leadership and the Strategic Acquisition of Information

“…Thus information acquisition only gives the firm a temporary information advantage, knowing the realization of the demand shock in the first of the two price‐setting periods. This setup of information, while used by Gilpatric and Li (), echoes the intuition of Eckard () that the leader is “likely to be the first to detect shifts in industry demand” and corresponds to “faster” information in Lippman and McCardle ().…”

“…If, instead, their products are complements, then prices set by the firms become strategic substitutes and leading is again preferred to following while the simultaneous Nash payoff lies in between. In this circumstance, the way that early information impacts the timing of the price competition would be very much like that in a Cournot–Stackelberg market with homogenous product (Gilpatric and Li ). The value of information to the firms will then be strictly positive.…”

“…To endogenize the sequence of price settings by the firms, we use the model of an extended game with observable delay of Hamilton and Slutsky (). Several articles have used this model to study endogenous timing in various duopoly games, mostly in quantity competition (e.g., Amir and Grilo ; Normann ; Gilpatric and Li ) but also in price competition (e.g., Amir and Stepanova ; Mago and Dechenaux ; Matsumura and Ogawa ) and other games like tax competition (Kempf and Rota‐Graziosi ). In this model, a firm's action (price setting) can take place in one of two consecutive periods and it commits to a time (simultaneously with the other firm) before the beginning of the first period.…”

Game-theoretic analysis of Stackelberg oligopoly with arbitrary rank reflexive behavior of agents

“…The comparative analysis of Cournot and Stackelberg equilibriums effectiveness was carried out (Liu et al, 2005). The reflexive dynamic games for Stackelberg model were considered (Gilpatric and Li, 2015), and the influence of the information advantage was analyzed on the agents' effectiveness. The interaction of several Stackelberg leaders was investigated (Geraskin and Chkhartishvili, 2017).…”