The Brag is Worse than the Fight: Pre-Announcing Competitive Decisions in Oligopoly Markets

We examine a duopolistic setting in which firms pre-announce their future competitive decisions (e.g., production quantities, capacity investments, etc.) before they actually undertake them. We show that, whether competing with substitute or complementary products, firms overstate their future actions in their pre-announcements, and choose higher real actions than the ones they would choose absent pre-announcements. If products are substitutes, firms overstate their future actions trying to preempt their rivals and, if products are complements, they do so to facilitate collusion. However, in both types of competition, we find that social welfare is maximized when the tolerance for this overstating behavior is at an intermediate level. ∗We would like to thank helpful comments from Mark Bagnoli, Tim Baldenius, Jeremy Bertomeu, Anne Beyer, Mingcherng Deng, Ron Dye, Pingyang Gao, Jon Glover, Bjorn Jorgensen, Chandra Kanodia, Oliver Kim, Pierre Liang, Jing Li, Martin Loeb, John O’Brien, Jose Plehn-Dujowich, Haresh Sapra, Jack Stecher, Phillip Stocken, Susan Watts, and participants at the Carnegie Mellon University workshop, University of Maryland workshop, and the 2010 Accounting Theory Conference at University of Chicago.