The Impact of Information Sharing Opportunities on Market Outcomes: An Experimental Study

Abstract

Information regarding uncertain demand conditions or industry costs, as well as the opportunity to share this information, can have an important impact on firm behavior. A series of recent game-theoretic models have characterized the incentives for firms to share information regarding uncertain parameters [3; 7; 8; 13; 14; 16; 22; 26; 20; 21 provide a comprehensive survey]. Most of the models assume that behavior in the output market is noncooperative, regardless of the firms' information sharing decisions. This paper reports a series of 15 laboratory sessions that test the noncooperative, backward induction approach of these models. The results suggest that pricing behavior may be influenced by the information sharing decision: Under most conditions the noncooperative Nash model accurately describes average behavior, although in certain conditions information sharing appears to facilitate tacit collusion. The paper also estimates a simple behavioral model of learning that describes how experimental subjects learn the optimal information sharing decision as an alternative to the theories' backward induction assumption. The information sharing models tested here have been interpreted as identifying the incentives for competitive firms to form a trade association that reduces their uncertainty. Thousands of trade and professional associations are active worldwide, and the majority collect information from their members that is aggregated and distributed through association statistical programs. The theoretical models demonstrate how three variables influence the information sharing incentives: 1) The type of competition (Bertrand or Cournot); 2) the nature of the goods (substitutes or complements); and, 3) the source of uncertainty (demand or cost). The first two variables determine the slope of the firms' reaction functions, and the uncertainty source along with the information sharing decision determines the degree of correlation among the firms' strategies. The incentive for noncooperative firms to share information shifts as these three variables change because reduced correlation has a negative or positive effect on profit depending upon the slope of the reaction functions.