Carlos Corona

Bluffing Contests: The Real Effects of Pre-Announcing Competitive Decisions

We examine a duopolistic setting in which firms pre-announce their future competitive decisions (e.g. prices, production quantities, capacity investments) before they actually undertake them. We show that firms overstate their future actions in their pre-announcements, and that their real action levels are higher than the ones they would choose absent pre-announcements. In addition, we show that, the equilibrium real actions and welfare in Cournot competition reach a maximum value when pre-announcements are intermediately credible, whereas, actions are maximized and welfare minimized at that same credibility level in Bertrand competition.We also examine the equilibrium with discretionary pre-announcements. We find that, in Cournot competition, there is a unique equilibrium in which both firms pre-announce regardless of whether disclosure policies are observable or not. In Bertrand competition, however, the equilibrium is contingent on the observability of the disclosure policies. If they are observable, unless both firms have a low credibility, only the firm with the higher credibility pre-announces and the other remains silent. Nevertheless, when disclosure policies are not observable, both firms pre-announce in a unique equilibrium.