Disclosure Policy in a Mixed Market

Abstract

This paper investigates the optimal disclosure strategy for private information in a mixed duopoly market, where a state-owned enterprise (SOE) and a joint-stock company compete to supply products. I construct a model where the two firms compete in either quantity or price, and uncertainty is associated with either marginal cost or market demand. The model identifies the optimal disclosure strategies that constitute a perfect Bayesian equilibrium by type of competition and uncertainty. In Cournot competition, both firms disclose information under cost uncertainty, while only the SOE or neither firm discloses information under demand uncertainty. Alternatively, in Bertrand competition, only the joint-stock company discloses information under cost uncertainty or demand uncertainty. Recently, developed countries have required the same level of disclosure standards for SOEs as for ordinary joint-stock companies. The findings described in this paper warn that such mandatory disclosure by SOEs can trigger a reaction by joint-stock companies, putting the economy at risk of a reduction in welfare.

Acknowledgements

The author is grateful to Jeroen Suijs (Editor) and an anonymous reviewer for their insightful comments. This paper is based on research conducted during the author's visit to the University of Edinburgh Business School. Earlier versions of this paper were presented at 24th Asian-Pacific Conference on International Accounting Issues, 10th Biennial Pacific Rim Conference of Western Economic Association International, and seminars at Hosei University, Keio Business School, Kobe University, and Osaka University. The author would like to thank participants in the conferences and seminars for their helpful suggestions.

Notes

¹Note that the SOE and the joint-stock company are often referred to, respectively, as the ‘public firm’ and the ‘private firm’ in the economic literature.

²While I consider two types of uncertainty (i.e. cost uncertainty and demand uncertainty), both of which are especially important to competing firms, note that the existing literature suggests that a more general distinction between the two types of uncertainty relates to the private and common values for the firms. See Raith (1996) for a detailed explanation.

³See Verrecchia (2001), Dye (2001), and Beyer, Cohen, Lys, and Walther (2010) for comprehensive reviews of the disclosure policy literature.

⁴George and La Manna (1996) state that the BBC is committed to minimum production targets in terms of drama, documentaries, and news coverage. Indeed, the Department for Culture, Media and Sport (2006, p. 2) documents ‘the BBC's public nature and its objects’ as ‘(1) The BBC exists to serve the public interest. (2) The BBC's main object is the promotion of its Public Purposes.’ If the objective of the BBC were not public welfare but profit maximisation, the company would broadcast a wider variety of programmes to compete with private channels.

⁵Channel 4 (2014) states: ‘Channel 4 is a publicly-owned, commercially-funded public service broadcaster. … Non-executive directors are appointed by OFCOM in agreement with the Secretary of State for Culture, Media and Sport. This system ensures our not-for-profit status…’

⁶SRGSSR (2012) states:

SRG is a media enterprise governed by private law and operated in accordance with the principles of company law. Its remit is based on the Swiss Federal Constitution, the Federal Radio and Television Act (RTVA) and its charter, and is one of public service. As a non-profit organisation, SRG derives around 70 percent of its revenues from license fees and about 30 percent from commercial activities.

Moreover, Legislative Council of the Hong Kong (2006) refers to the ZDF as being: ‘Established in 1963 as an independent non-profit-making corporation under the authority of all the federal states of Germany.’

⁷VHI (2007) states:‘… There is no assessment of the positive impact on consumers of the not for profit status of Vhi Healthcare…’ In addition, Civitas (2013) notes:

In 1957, the government established the Voluntary Health Insurance (VHI) Board, a non-profit state-owned insurance company whose board members were appointed by the Department of Health … In the 1990s, partly due to concerns that the VHI's dominance was breaching EU competition law, the insurance market was opened to greater competition, after which a variety of private providers increased their market share, though in 2006 the VHI represented 75% of the market and in December 2009 it still had a 65.5% share.

⁸Moody's (2013) discusses: ‘Avinor AS benefits from a near monopoly position in Norway, accounting for over 90% of Norwegian passenger traffic in 2012. It is currently 100% owned by the Kingdom of Norway.’ Moreover, Danske Bank (2013) states: ‘Avinor AS is owned by the Norwegian government and is characterised as a sector political investment with socio-political targets rather than a profit-maximising business model.'

⁹V/Line (2013) states: ‘As a not-for-profit operator, V/Line is fully owned by the State of Victoria, with train services running between Melbourne and the following townships…'.

¹⁰See OECD (2005, p. 98) for details of Swedish and UK cases.

¹¹Although c + k_i or a + e may take negative values given the assumption of normality, this specification has been conventionally used in the past literature (Vives, 1984) because it helps simplify the analysis and allows for closed-form solutions. Indeed, one can make the probability that c + k_i or a + e is negative arbitrarily small by appropriately choosing the variances of the model. Following the literature, I assume a large c relative to s_i and a large a relative to V and σ_i, such that the probability of negative cost or demand is negligible.

¹²Following previous studies that consider the information-sharing problem overviewed in the introduction, I confine the demand schedule to a linear form primarily because I construct a stochastic duopoly model. If I introduced a more general, say, nonlinear demand function, the expected value of the objective functions could not be algebraically described using the parameters for variances (i.e. σ_i and V) because the degree of the random variable terms included in the objective functions could exceed two.

¹³The author is very grateful to the editor and an anonymous reviewer for suggesting the precise derivation process for the equilibrium strategies in the appendix and the concise functional forms in Lemmas 1, 2, 3, and 4 that summarise all combinations of the disclosure strategies taken by the two firms.

¹⁴‘Strategic substitute' in Cournot competition means that if one firm commits to decrease (increase) its supply, the other firm will strategically increase (decrease) its supply to increase its profit in response. See Bulow, Geanakoplos and Klemperer (1985).

¹⁵‘Strategic complement' in Bertrand competition means that if one firm commits to increase (decrease) the price, the other firm strategically increases (decreases) the price to increase its profit in response. See Bulow et al. (1985).

Additional information

Funding

Financial support of Grant-in Aid for Challenging Exploratory Research (26590049) from the Ministry of Education, Culture, Sports, Science, and Technology of Japan (MEXT) is greatly appreciated.