We present a differentiated duopoly model, in which an industry leader’s disclosure of innovations achieved through research and development (R&D) activities reveals efficiency gains and enables a rival to free ride. Competitive intensity is measured by the degree of product substitutability. A tension arises between the incentive to influence the rival’s pricing or output decision by sharing information on R&D innovations and the incentive to avoid knowledge spillovers that allow the rival to also benefit. We show that either no or partial disclosure equilibrium prevails. In contrast to a commonly held view of an inverse relation between competition and disclosure, we identify conditions on knowledge spillovers, under which more disclosure transpires in equilibrium as competition intensifies. This result holds, irrespective of whether firms engage in price or quantity competition. We also show that a more innovative technology leads to more (less) disclosure in the case of price (quantity) competition.
Review of Accounting Studies – Springer Journals
Published: Jun 17, 2014
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