Overcoming Impediments to Information Sharing

Full Title of Reference

Overcoming Impediments to Information Sharing

Full Citation

Amitai Aviram and Avishalom Tor, Overcoming Impediments to Information Sharing, 55 Ala. L. Rev. 231 (2004). Web SSRN

BibTeX

Categorization

• Issues: Economics of Cybersecurity; Information Sharing/Disclosure; Public-Private Cooperation; Risk Management and Investment

• Approaches: Regulation/Liability

Key Words

Disclosure Policy, Information Asymmetries, Interdependencies, Outreach and Collaboration, Transparency

Synopsis

The paper is based on the premise that the existing theoretical framework overstates the likelihood of information sharing in many circumstances because it ignores several important impediments to the sharing of information. It argues that when deciding whether to share information, firms consider their private welfare. Discrepancies between social and private welfare may lead firms excessively to share information to anti-competitive ends - in facilitating of cartels and other harmful horizontal practices - a problem both antitrust scholarship and case law have paid much attention to. On the other hand, legal scholars have paid far less attention to the opposite type of inefficiency in information sharing among competitors - namely, the problem of sub-optimal information sharing. This phenomenon can generate significant social costs and is of special importance in network industries because the maintenance of compatibility, a key to producing positive network effects, typically requires information sharing. Understanding the hitherto neglected impact of sub-optimal information sharing is important not only for many areas of antitrust law, but also for developing effective policies towards network industries and critical infrastructures more generally, as well as for improving those procedural rules that concern information exchange among litigating parties.

This paper therefore advances the legal analysis of impediments to efficient information sharing in a number of significant ways: First, it shows that the strategic behavior of competitors may erect an economic barrier to information sharing that has not been previously addressed in the literature - the fear of degradation. This form of strategic behavior involves the strategic refusal to share information when the refusal inflicts a greater harm on one's rivals than on oneself, and thus generates a competitive advantage. Second, the paper reveals a hitherto unrecognized set of behavioral impediments to information sharing, wherein rivalry norms and managers' risk attitudes bias competitors' judgments of the prospects of information sharing and the status-quo bias and ambiguity aversion lead these decision makers to avoid such arrangements. Third, it integrates these economic and behavioral insights with the findings of the extant literature to create a new framework for predicting when private information sharing will be suboptimal. Finally, the authors suggest how the alignment of private information sharing with social optimality may be promoted, based on the framework developed here.

The Assessment of Information Sharing in the Extant Literature

The paper first reviews the extant literature on information sharing, with special attention to the long-understood problem of free riding – that is, the ability of one actor freely (or more cheaply) to enjoy the benefits of the information its counterpart has produced at a cost. The risk of rivals’ free riding, much discussed in the literature, reduces the incentive of each firm to collect and share information.

The Problem of Degradation

This section provides a discussion of the problem of degradation – namely, the private costs competitors must bear when sharing private information to their rivals’ benefit. The authors challenge the common assumption that information is a non-rivalrous good, and thus points out that sharing information entails, besides the costs of collecting and disseminating information, also the cost of losing a competitive edge over rivals that benefit from the information.

Judgment under Uncertainty, and the Difficulty of Embarking on an Information Sharing Arrangement

In part IV and V, the authors explore a number of behavioral phenomena that impede rivals’ ability to exploit circumstances where limited cooperation by way of information exchange becomes profitable. Part IV focuses on the judgment stage where market participants must determine the likely outcomes of the alternative courses of action available to them. It shows how established rivalry norms inhibit competitors’ ability to identify profitable cooperation opportunities and how managers’ risk attitudes may lead them to underestimate the benefits of information sharing arrangements. Part V follows by exploring likely patterns of competitors’ choice – revealing that their preference for maintaining the status quo and aversion to ambiguity may lead competitors consciously to forego profitable, though risky, information sharing arrangements.

The Manifestation of Impediments to Information Sharing in Different Market Settings

This section identifies the circumstances where the various economic and behavioral impediments to socially beneficial information sharing are likely to exert their most significant effect, as well as the interactions between different impediments.

Overcoming Impediments to Information Sharing

Finally the authors consider those strategies and means, private and public, that may be effective in overcoming these impediments. In doing so, they lay a foundation for future research and effective legal policy in important areas of antitrust law, regarding network industries and critical infrastructures, and concerning procedural law.

Additional Notes and Highlights

Expertise Required: Economics - Low

Outline:

 I. Introduction
 II. The Assessment of Information Sharing in the Extant Literature
 III. The Problem of Degradation
    1. The Rivalrous Characteristic of Information
    2. Degradation (With an Emphasis on Network Environments)
 IV. Determining the Prospects of Information Sharing: Judgment under Uncertainty
    1. Uncertainty and the Attractiveness of Information Sharing
    2. Norms of Rivalry: Recognizing the Value of Limited Cooperation
    3. Managerial Risk Perceptions and the Illusion of Control
 V. The Difficulty of Embarking on an Information Sharing Arrangement: Boundedly Rational Decision Making
    1. The Biasing Power of the Status Quo: Loss Aversion and Omission Bias 35
    2. Comparative Aversion to Ambiguity
 VI. The Manifestation of Impediments to Information Sharing in Different Market Settings
    1. Economic Impediments
    2. Behavioral Impediments
 VII. Overcoming Impediments to Information Sharing
    1. Overcoming Economic Impediments
    2. Overcoming Behavioral Impediments
 VIII. Conclusion