DP19757 Output Signaling in Oligopoly
We consider models of repeated oligopoly competition where firms set quantities and one or more firms have private information about their marginal costs. This structure gives rise to strategic incentives to signal information about costs using output choices in order to affect rivals' future outputs. Consistent with the standard intuition from reaction functions, strategic incentives with quantity-setting tend to lead to higher equilibrium output and lower equilibrium prices, which are the opposite changes to those observed in similar models where price-setting is assumed. We emphasize a more surprising, and to the best of our understanding novel, difference: the effects of strategic incentives in quantity-setting games remain substantial, or even become stronger, as market structure becomes less concentrated. In contrast, in price-setting games, we always find smaller effects in less concentrated markets.
