The dark side of competitive pressure
AbstractOne of the most basic principles in economics is that competitive pressure promotes efficiency. However, this pressure can also have a dark side because it makes firms reluctant to act on private information that is unpopular with consumers. As a result, firms that possess superior information about the consequences of their actions for consumers' welfare may choose not to use it. We develop this idea in a simple model of delegated investment in which agents are fully rational and risk neutral, and agency problems are absent. We show that competitive pressure obliges firms to make inefficient decisions when their information advantage over consumers is relatively small. This result could be applied to a broad range of economically important situations.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-43.
Date of creation: 2002
Date of revision:
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-11-04 (All new papers)
- NEP-COM-2002-11-18 (Industrial Competition)
- NEP-MIC-2002-11-20 (Microeconomics)
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