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Keywords:

  • capacity management;
  • volume competition;
  • information asymmetry;
  • game theory;
  • Cournot game

Abstract

In this article, we explore when firms have an incentive to hide (or reveal) their capacity information. We consider two firms that aim to maximize profits over time and face limited capacity. One or both of the firms have private information on their own capacity levels, and they update their beliefs about their rival's capacity based on their observation of the other firm's output. We focus on credible revelation mechanisms—a firm may signal its capacity through overproduction, compared to its myopic production levels. We characterize conditions when high-capacity firms may have the incentive and capability to signal their capacity levels by overproduction. We show that prior beliefs about capacity play a crucial, and surprisingly complex, role on whether the firm would prefer to reveal its capacity or not. A surprising result is that, despite the fact that it may be best for the high-capacity firm to overproduce to reveal its capacity when capacity information is private, it may end up with more profits than if all capacity information were public knowledge in the first place. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013