Unraveling of Information: Competition and Uncertainty

Abstract

This paper examines incentives for information disclosure in a oligopolistic market when buyers are unsure of the existence of that information. Previous empirical and theoretical work has shown that mandatory disclosure laws can be binding when buyers do not know whether the information exists. This paper shows that the information unraveling result is strengthened by competition not only because a market with more firms is increasingly likely to have at least one firm with quality high enough to want to disclose it (thus starting the information unraveling result) but also because firms reveal information that makes themselves look bad if they can make their competitors look worse. This results in prisoner's dilemma style incentives to reveal that ensures full disclosure as the number of firms goes to infinity.KEYWORDS: asymmetric information, quality uncertainty, information disclosure, information revelation * email to: andrew.stivers@orst.edu. I would like to thank Bruce McGough, Max Stinchecombe and Preston McAfee and the anonymous referees for helpful comments.

Accreditation in a differentiated duopoly

“…12 Two exceptions are Stivers (2004) and Caldieraro et al (2011). 13 Here, we assume a fixed accreditation fee (e.g., a single regulated accreditation body).…”

“…The so‐called “unraveling literature,” being an important part of the literature on self‐disclosure, is typically concerned with disclosure incentives where disclosure reveals the exact product quality and where the firms are local monopolies (strategic independence) since fully capturing the consumer surplus . The role of competition (oligopolistic markets) is addressed by Stivers (), Cheong and Kim (), Board (), Levin, Peck, and Ye () and Guo and Zhao (), Caldieraro, Shin, and Stivers (), Hotz and Xiao () and Janssen and Roy (). All these studies analyze price competition for substitutes where disclosure reveals information on exact product quality and where the disclosure costs are exogenous.…”

Product market pricing power, industry concentration and analysts’ earnings forecasts

“…However, theoretical models offer divergent views on information disclosure by competing firms. While Verrecchia (1983) and Clinch and Verrecchia (1997) propose that firms in industries characterized by intense product market competition disclose less information because of the potential harm to a firm's competitive position, Stivers (2004) demonstrates that the unraveling of proprietary information intensifies with competition. He argues that an industry with a greater number of competitors is more likely to have at least one firm with quality high enough to release its information, and therefore begins the process of unraveling the information.…”

Disclosing Multiple Product Attributes

“…Most of these studies, however, do not consider privately known horizontal product attributes. Instead, they often focus on incomplete product information of the seller (Shin, 1994), cost of product information acquisition and dissemination (Jovanovic, 1982;Verrecchia, 1983;Dye, 1986;Matthews and Postlewaite, 1985;Farrell, 1986;Shavell, 1994;Fishman and Hagerty, 2003;Dye and Sridhar, 1995;Stivers, 2004), or disclosure's impact on competition (Okuno-Fujiwara et al, 1990;Cheong and Kim, 2004;Board, 2009;Levin et al, 2009).…”