Information Sharing in Contests

• Date: 01 September 2015
• Author: Johannes Münster,Dan Kovenock,Florian Morath
• Published date: 01 September 2015
• DOI: http://doi.org/10.1111/jems.12105

Information Sharing in Contests

DAN KOVENOCK

Economic Science Institute

Chapman University

One University Drive Orange, CA 92866 USA

kovenock@chapman.edu

FLORIAN MORATH

Department of Public Economics

Max Planck Institute for TaxLaw and Public Finance

Marstallplatz 1 80539 Munich, Germany

florian.morath@tax.mpg.de

JOHANNES M¨

UNSTER

Universit¨

at zu K¨

oln

Staatswissenschaftliches Seminar

Albertus-Magnus-Platz 50923 K¨

oln, Germany

johannes.muenster@uni-koeln.de

We study the incentives to share private information ahead of contests, such as markets with

promotional competition, procurementcontests, or research and development (R&D). We consider

the cases where firms have (i) independent values and (ii) common values of winning the contest.

In both cases, when decisions to share information are made independently, sharing information

is strictly dominated. With independent values, an industry-wide agreement to share information

can arise in equilibrium. Expected effort is lower with than without information sharing. With

common values, an industry-wide agreement to share information never arises in equilibrium.

Expected effort is higher with than without information sharing.

1. Introduction

Information exchange between competing firms is an important issue for competition

authorities. Although information exchange agreements sometimes come along with

price-fixing agreements as part of a cartel, competition policy is also highly attentive

to information sharing that is not part of a wider arrangement and that typically is

more complex to assess (OECD, 2010). Worldwide, many competition authorities be-

lieve that such information exchange agreements can generate various types of effi-

ciency gains, but may also lead to restrictions of competition; therefore, the competitive

assessment of information exchange has to take into account the details of each case

(see OECD, 2010, 2012 for an international comparison). For example, according to the

European Commission (2011), the likelihood of efficiency gains on the one hand and

We thank Volker Hahn, Paul Heidhues, Kai Konrad, Salmai Qari, Dana Sisak, Roland Strausz, Nora Szech,

seminar participants in Berlin (Free University and Humboldt University), Bonn, Edinburgh, Magdeburg,

Mannheim, St. Gallen, Barcelona, participants at the 2009 meeting of SFB/TR15 in Caputh and at ESWC 2010

in Shanghai, and the two referees for helpful comments. Errors are our own. Morath and M¨

unster gratefully

acknowledge financial support from the Deutsche Forschungsgemeinschaft through SFB/TR 15. Kovenock

has benefited from the financial support of the Wissenschaftszentrum Berlin f¨

ur Sozialforschung.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume24, Number 3, Fall 2015, 570–596

Information Sharing in Contests 571

of anticompetitive effects on the other hand depend “on market characteristics such as

whether companies compete on prices or quantities and the nature of uncertainties on the

market” (§96) as well as on characteristics of the information exchange (§77–94). Sim-

ilarly, the U.S. Supreme Court has argued that the exchange of information among

competitors “does not invariably have anticompetitive effects; indeed such practices

can in certain circumstances increase economic efficiency and render markets more,

rather than less, competitive. [...] A number of factors including mostprominently

the structure of the industry involved and the nature of the information exchanged are

generally considered in divining the procompetitive or anticompetitive effects of this

type of interseller communication.”1

Economic theory can inform us about in which markets one should expect ef-

ficiency gains or anticompetitive effects from information sharing. The literature has

studied the incentives of firms to share information and the competitive implications of

information sharing for a wide array of models of oligopolistic competition. The results

from this literature also had an important impact on the guidelines that have been devel-

oped by competition authorities to deal with information exchange agreements (OECD,

2010).

In many markets, however, the strategic interaction between firms involves in-

vestment decisions that generate costs that cannot be recovered; hence, the competi-

tion resembles a contest or all-pay auction. Contest or “all-pay” characteristics of the

competition between firms can be found in many environments;2in particular, contest

structures are present in markets with intense advertising or promotional competition

(Schmalensee, 1976, 1992) and in research and development (R&D) races (Dasgupta,

1986; Kaplan et al., 2003). Moreover, Lichtenberg (1988) stresses the importance of “de-

sign and technical competitions” for public procurement and points out that these com-

petitions are best understood as contests.3

The incentives to share information ahead of a contest appear to have not yet been

explored. The literature so far does not yield firm conclusions about how to treat infor-

mation exchange in such markets, which differ in several aspects from standard models

of competition in prices or quantities. Todate, the main focus of the literature has been on

the implications of whether firms’ decision variables are strategic substitutes or strategic

complements. In the all-pay auction, however, these notions do not fit because the best

replies may be nonmonotonic, involving either marginal overbidding, or spending zero

effort.4Moreover, whereas competition authorities often emphasize the possibility that

information sharing may be efficiency enhancing, in an all-pay auction, the exchange

of information can lead to allocative inefficiencies due to mixed equilibrium strategies.

This feature also differentiates the all-pay auction from standard winner-pay auctions.

1. United States v.United States Gypsum Co. et al., 438 U.S. 422 (1978) n. 16. Compare also the U.S. Antitrust

Guidelines for Collaborations Among Competitors (Federal TradeCommission and U.S. Department of Justice,

2000).

2. See Konrad (2009) for a survey.

3. A recentexample is the competition between Airbus and Boeing about the U.S. Air Force tanker contract.

This contest lasted about 10 years and a “bid” finally corresponded to a several thousand pages proposal (New

York Times:European Plane Maker Submits Bid for U.S. Tankers, July 9, 2010; Boeing Press Release: Boeing

Submits KC-767 Advanced TankerProposal to U.S. Air Force.). Although EADS lost the contest, according to

its chairman, EADS spent “$200 million to compete for the tankers” (The Seattle Times: Rival knocks Boeing’s

“lowball” tanker bid, March 4, 2011), but the true cost of bidding (including all advertising cost, lobbying

expenditures, lawyer fees, etc.) may have been much higher.

4. In our analysis with continuous strategy spaces, formal best responses may not exist due to the open-

endedness problem arising with discontinuous payoff functions. When referring to best repliesin this context,

we are thinking of either ε-best replies or best repliesin finite approximations of the continuous strategy space.