The Dark Side of Competitive Pressure

Jason Cummins () and Ingmar Nyman ()

RAND Journal of Economics, 2005, vol. 36, issue 2, 361-397

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.

Keywords: Production and Organizations: General Market Structure and Pricing: General Asymmetric and Private Information s Competition; Information Aggregation; Incentives (search for similar items in EconPapers)
JEL-codes: D20 D40 D82 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (17)

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Working Paper: The dark side of competitive pressure (2002)
Working Paper: The Dark Side of Competitive Pressure (2002)
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