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Market feedback, cost system choice and competitve pricing: the advantage of not being a leader

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Author Info
Eddy Cardinaels
Filip Roodhooft ()
Luk Warlop
Gustaaf Van Herck (Vlerick Leuven Gent Management School)

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Abstract

This study experimentally investigates the value of cost report accuracy in an interactive pricing context. Market agents received feedback about their own profits via either a volume-based costing or a more accurate activity-based costing report. They also received a typical market report containing the performance of their rivals. While prior work suggested that market discipline and learning from salient competitors can overcome performance decrements due to inaccurate costing, our results imply that the corrective nature of market feedback depends on the decision maker's role in the competitive play. Compared to other participants, decision makers endowed with the role of a 'reputational' market leader are less effective in screening available market feedback because they predominantly fixate on their own cost data. Even when receiving biased volume-based costing, reputational leaders ignore valuable market signals of opponents having access to more accurate cost data. Consequently other market players can take advantage of them.

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Paper provided by Vlerick Leuven Gent Management School in its series Vlerick Leuven Gent Management School Working Paper Series with number 2004-06.

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Length: 33 pages
Date of creation: 20 Apr 2004
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Handle: RePEc:vlg:vlgwps:2004-06

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  2. Mark W. Nelson & Susan D. Krische & Robert J. Bloomfield, 2003. "Confidence and Investors' Reliance on Disciplined Trading Strategies," Journal of Accounting Research, Blackwell Publishing, vol. 41(3), pages 503-523, 06. [Downloadable!] (restricted)
  3. Bloomfield, Robert & Libby, Robert & Nelson, Mark W., 1999. "Confidence and the welfare of less-informed investors," Accounting, Organizations and Society, Elsevier, vol. 24(8), pages 623-647, November. [Downloadable!] (restricted)
  4. Haskel, Jonathan & Scaramozzino, Pasquale, 1997. "Do Other Firms Matter in Oligopolies?," Journal of Industrial Economics, Blackwell Publishing, vol. 45(1), pages 27-45, March. [Downloadable!] (restricted)
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  5. Waller, William S. & Shapiro, Brian & Sevcik, Galen, 1999. "Do cost-based pricing biases persist in laboratory markets?," Accounting, Organizations and Society, Elsevier, vol. 24(8), pages 717-739, November. [Downloadable!] (restricted)
  6. Vives, Xavier, 1990. "Information and competitive advantage," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 17-35. [Downloadable!] (restricted)
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  7. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November. [Downloadable!] (restricted)
  8. Alba, Joseph W & Hutchinson, J Wesley, 2000. " Knowledge Calibration: What Consumers Know and What They Think They Know," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 27(2), pages 123-56, September.
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  10. Colin Camerer & Dan Lovallo, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March. [Downloadable!] (restricted)
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