The Effects of Supply Uncertainty on Voluntary Disclosure of Demand

May 2023
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Supply disruptions are increasing in magnitude and frequency imbuing our global economy with greater levels of supply uncertainty. In Cournot duopoly, I examine how supply uncertainty affects the voluntary disclosure of a firm’s private demand information. In addition to supply uncertainty, I allow for variation in product substitutability (substitutability effect) and in the degree to which private demand information affects the rival firm’s demand (spillover effect). I show that the partial disclosure equilibrium depends on a firm’s competitive advantage characterized by the relative importance of the spillover effect, substitutability effect, and the firms’ supply uncertainty. In particular, I show that absent supply uncertainty the firm with private information about product demand discloses good news (bad news) when the substitutability effect (spillover effect) is most pronounced. By incorporating the role of supply uncertainty in a firm’s disclosure decision, I demonstrate that supply uncertainty diminishes the substitutability effect and enhances the spillover effect. I show that with supply uncertainty the firm possessing private information about product demand discloses good news (bad news) when the supply uncertainty does not (does) mute the relative dominance of the substitutability effect over the spillover effect. I also show that the disclosure region for both good news and bad news, in general, decreases with increases in supply uncertainty of both the firm and its rival.

Economics, General