Information sharing about a demand shock

Abstract

This paper examines two questions in asymmetric Cournot and Bertrand oligopoly with a demand shock. Under which conditions is information sharing a subgame-perfect equilibrium? What is the welfare effect when firms are better off? Given these questions, the normal assumptions in the earlier literature can be relaxed in three ways: demand functions can be asymmetric; a demand shock can affect firms differently; distributions of the demand shock and information signals can be arbitrary. Under these general assumptions, the answer to the first question is: every firm's response to the demand shock is stronger when all firms have perfect information than when one firm does so alone; the answer to the second question is: social welfare increases in Cournot competition, and consumer surplus decreases in Bertrand competition.