Insider trading with product differentiation

Abstract

This paper investigates the effect of product differentiation on the real and financial decisions of a publicly-owned firm, competing $$\grave{a}$$ la Cournot with another privately-owned firm. The results show that the degree of product differentiation affects the stock price coefficients (i.e. the market maker’s response to the real signal and to the total order flow signal) and the output of the publicly-owned firm. It also appears to have a detrimental effect on the manager’s profits and compensation scheme. The paper then proposes an extension of the benchmark model to incorporate Cournot and Stackelberg competition between two insiders in the financial market. The type of the financial competition adopted has also an effect on the results of the benchmark model that sometimes depend on the degree of product differentiation.