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Why your company should sometimes share information with the competition

dram chips
Reuters/Nicky Loh
Data sharing is caring.
This article is more than 2 years old.

Data gives companies a strategic advantage, so it’s generally accepted that market information isn’t something to be shared with competitors. Regulators, too, oppose information sharing, believing it softens competition. But are there cases in which firms and their customers could benefit from sharing information with each other about the market and their consumers? This is the question Stanford Graduate School of Business professor Pedro Gardete set out to answer in a working paper.

Gardete’s research found that in certain industries, sharing information is actually better for competitors than hoarding it, and it’s good for customers too. He looked at the semiconductor industry, specifically manufacturers of common memory chips known as DRAM, for dynamic random access memory. DRAM chips are found in most electronic products, like computers, cell phones, printers, and game consoles. Gardete chose the semiconductor industry because there is a good deal of uncertainty in the market, which tends to follow economic ups and downs. There are also just a handful of players, all of whom are global.

Most important, DRAM manufacturers like Samsung and Micron rely heavily on market intelligence to make decisions about lowering or increasing production, which requires both significant capital and time. “It takes about one quarter to expand production lines and another quarter for the chips to be produced, so companies have to make decisions six months ahead of when the chips will hit the market,” says Gardete.

Players in the industry usually know the technology their competitors use, and because of that also have a good sense of those firms’ production costs. But they know little about their competitors’ customers or their demand. That’s because DRAM manufacturers generally believe that sharing information magnifies mistakes and that outweighs any potential benefits. If, for example, in sharing information, manufacturers decide that demand for chips will be high in the coming year and then it winds up low, everyone suffers from too many chips in a market that can’t absorb them. The general belief is that the cost of a potential mistake from sharing inaccurate information will be higher than any benefit that comes from sharing information that is accurate.

The market for memory chips, however, is different than other markets, says Gardete. “In classic markets, like packaged goods, demand can’t absorb overproduction. If you sell tomatoes and one year there is an oversupply, there is still only so much tomato sauce or ketchup people can consume, but the semiconductor market is different—demand is able to absorb a lot of production,” he says. Original equipment manufacturers like Apple or Samsung can easily reconfigure their computers to use 8, 16, or 32 gigabytes of memory where they used to sell a slightly different model with 2 or 4 gigabytes. DRAM manufacturers also have to scramble a bit to package chips differently, but overall it’s still profitable for them.

To see if he was right about this market, Gardete created a mathematical model that allowed him to look at the DRAM industry in hindsight, using data from seven major DRAM producers about production, capacity, cost, and demand from 1991 to 2011. By comparing the model’s predictions with the actual decisions that were made at the time, Gardete was able to estimate the quality of the information available to manufacturers then. He could compare predictions about what would have happened if companies had shared information versus what actually happened in the market at the time.

Gardete found his hunch was right, at least when it came to the semiconductor industry. “I found empirically that this is one industry where competitors benefit from sharing information,” he says. “Manufacturers make better decisions because pooled information is much more accurate information.”

Businesses operating in industries where products are reconfigurable and where demand can absorb overproduction, like electronic components, should consider legal ways of sharing information, says Gardete. That would also allow these firms to anticipate ups and downs in the market more precisely, smoothing out the industry’s instabilities.

Although it might seem counter-intuitive that this kind of sharing—which looks a lot like collusion—is good for consumers, the research showed it was. “That’s because the market makes better decisions so it’s producing the right amount to meet demand,” says Gardete. And that means prices are, for the most part, in line with what consumers are willing to pay. “The more accurately manufacturers can forecast demand,” he says, “the better decisions they’ll make in terms of meeting the needs of the customers.”

Pedro M. Gardete is an assistant professor of marketing at Stanford Graduate School of Business. His working paper is “Competing Under Asymmetric Information: The Case of DRAM Manufacturing.”

This post originally appeared at Stanford Business.

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