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The Dark Side of Competitive Pressure

Author

Listed:
  • Jason G. Cummins

    (Brevan Howard, Inc.)

  • Ingmar Nyman

    (City University of New York)

Abstract

When 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.

Suggested Citation

  • Jason G. Cummins & Ingmar Nyman, 2005. "The Dark Side of Competitive Pressure," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 361-397, Summer.
    • Handle: RePEc:rje:randje:v:36:y:2005:2:p:361-397
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    Citations

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    Cited by:

    1. Roland Hodler & Simon Loertscher & Dominic Rohner, 2010. "Biased Experts, Costly Lies, and Binary Decisions," Working Papers 10.01, Swiss National Bank, Study Center Gerzensee.
    2. Ascensión Andina-Díaz & José A. García-Martínez, 2014. "Media silence, feedback power and reputation," Working Papers 2014-03, Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center.
    3. Alex Young, 2018. "How does competition affect real earnings management to meet or beat targets? Evidence from import tariff reductions," Annals of Finance, Springer, vol. 14(3), pages 331-342, August.
    4. Matthew J. Baker & Ingmar Nyman, 2017. "Job Hoarding," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 173(4), pages 688-722, December.
    5. Ascensión Andina Díaz & José A. García-Martínez, 2016. "A careerist judge with two concerns," Working Papers 2016-02, Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center.
    6. Kemal Kivanç Aköz & Cemal Eren Arbatli, 2016. "Information Manipulation in Election Campaigns," Economics and Politics, Wiley Blackwell, vol. 28(2), pages 181-215, July.
    7. Abhinav Sacheti & Ian Gregory-Smith & David Paton, 2016. "Managerial Decision Making Under Uncertainty," Journal of Sports Economics, , vol. 17(1), pages 44-63, January.
    8. Andina-Díaz, Ascensión & García-Martínez, José A., 2020. "Reputation and news suppression in the media industry," Games and Economic Behavior, Elsevier, vol. 123(C), pages 240-271.
    9. Hongbin Cai & Qiao Liu, 2009. "Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms," Economic Journal, Royal Economic Society, vol. 119(537), pages 764-795, April.
    10. Jason G. Cummins & Ingmar Nyman, 2013. "Yes Men in Tournaments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 621-659, December.
    11. Matthew Baker & Ingmar Nyman, 2009. "Competitive Pressure and Lying in Search Markets," Economics Working Paper Archive at Hunter College 426, Hunter College Department of Economics.
    12. Ascensión Andina-Díaz, 2015. "Competition and uncertainty in a paper’s news desk," Journal of Economics, Springer, vol. 116(1), pages 77-93, September.
    13. Kemal K?vanc Akoz & Cemal Eren Arbatli, 2013. "Manipulated voters in competitive election campaigns," HSE Working papers WP BRP 31/EC/2013, National Research University Higher School of Economics.
    14. Po-Chin Wu & Shiao-Yen Liu & Ming-Fang Yang, 2017. "Nonlinear Exchange Rate Pass-Through: The Role of National Debt," Global Economic Review, Taylor & Francis Journals, vol. 46(1), pages 1-17, January.
    15. Alex Chu & Xingqiang Du & Guohua Jiang, 2011. "Buy, Lie, or Die: An Investigation of Chinese ST Firms’ Voluntary Interim Audit Motive and Auditor Independence," Journal of Business Ethics, Springer, vol. 102(1), pages 135-153, August.
    16. Mike Felgenhauer, 2012. "Revealing information in electoral competition," Public Choice, Springer, vol. 153(1), pages 55-68, October.
    17. Atawnah, Nader & Balachandran, Balasingham & Duong, Huu Nhan & Podolski, Edward J., 2018. "Does exposure to foreign competition affect stock liquidity? Evidence from industry-level import data," Journal of Financial Markets, Elsevier, vol. 39(C), pages 44-67.
    18. Ingmar Nyman & Matthew Baker, 2008. "Conformity in search markets," Economics Working Paper Archive at Hunter College 422, Hunter College Department of Economics.
    19. Cherbonnier, Frédéric & Lévêque, Christophe, 2021. "The impact of competition on expert's information disclosure: the case of real estate brokers," TSE Working Papers 21-1255, Toulouse School of Economics (TSE).
    20. Ingmar Nyman & Jason G. Cummins, 2005. "Information Management in Rank-Order Tournaments," Economics Working Paper Archive at Hunter College 413, Hunter College Department of Economics.

    More about this item

    Keywords

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    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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