The Dark Side of Competitive Pressure
AbstractWhen firms are better informed than their consumers---for example, in many service industries firms know more than their customers about the benefits of different alternatives---competitive pressure may inhibit efficiency because it forces firms to cater excessively to consumers' opinions. We develop this idea in a simple model of investment management in which agency problems are absent. We show that competitive pressure may prevent firms from using information that contradicts consumers' prior beliefs. In particular, the inefficiency occurs when the firms' informational advantage is small, and may, in fact, be exacerbated by making the consumer better informed. By contrast, the inefficiency shrinks with the number of firms.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 36 (2005)
Issue (Month): 2 (Summer)
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Other versions of this item:
- Jason G. Cummins & Ingmar Nyman, 2002. "The dark side of competitive pressure," Finance and Economics Discussion Series 2002-43, Board of Governors of the Federal Reserve System (U.S.).
- Jason G. Cummins & Ingmar Nyman, 2002. "The Dark Side of Competitive Pressure," Hunter College Department of Economics Working Papers 02/3, Hunter College: Department of Economics, revised 2002.
- D20 - Microeconomics - - Production and Organizations - - - General
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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