Capacity Choice and Duopoly Incentives for Information Sharing

Abstract

We examine a three‐stage game in which duopolists face a random‐demand intercept. Firms first choose capacities, then decide whether to commit to share the private information they will receive about the intercept. After the private information is observed, firms choose output levels. The costless capacity‐limiting case of our model is equivalent to standard models. We show that even small capacity costs may reverse the incentives to share information and lead to equilibria in which information sharing occurs. At some capacity‐cost levels, sharing is an equilibrium for conventional reasons (equal expected outputs but higher variance with sharing), while at other cost levels, it is an equilibrium because expected outputs are lower (and, hence, expected prices are higher) with sharing.