Disclosure of Investment Information in a Vertically Related Industry

Abstract

This study investigates the strategic disclosure of a downstream firm’s information regarding cost-reducing investment in a vertically related industry. Disclosing information affects an (common) upstream firm’s input price (i.e., vertical strategic effects) and a rival downstream firm’s output level (i.e., horizontal strategic effects). We show that the downstream firm is willing to withhold its information as the products become more differentiated because the horizontal strategic effects decrease with the products differentiation degree. This implies that non-disclosure, rather than disclosure, can convey an aggressive investment (i.e., lower marginal costs) to a rival downstream firm when the products are sufficiently differentiated. Moreover, we show that the downstream firm may disclose its information and pursue its investment at a minimum level when the products are extremely differentiated. In this case, they desire to reveal high marginal costs (i.e., a low investment level) to the upstream firm to reduce the input price, regardless of horizontal market competition.