Demand-Enhancing Investment, Voluntary Disclosure, and Knowledge Spillovers

In a price-competition duopoly model, a market leader’s disclosure of demand-enhancing R&D activities entails knowledge spillovers that allow a rival to infer the leader’s demand increase and to also increase its own demand. The cost and benefit of disclosure emerge endogenously. We show that the leader discloses proprietary R&D information if and only if it obtains a small increase in demand, i.e., discloses bad news. More disclosure transpires when (i) competitive intensity increases, (ii) the leader invests more in demand-enhancing R&D, or (iii) knowledge spillovers are smaller. By extending the model to a setting in which investment is endogenous, we further show that the leader invests and discloses more when investment is private than when it is publicly observable. As a result, in our model, information asymmetry regarding R&D investment reduces information asymmetry concerning R&D outcomes. Ex ante, overinvestment arises because the privacy of investment precludes the leader from affecting the rival’s pricing decision with investment under no disclosure. Ex post, the leader discloses more R&D information to avoid the rival’s aggressive pricing.