The dark side of competitive pressure

Jason Cummins () and Ingmar Nyman ()

No 2002-43, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: One 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.

Keywords: Investments; Competition (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-com and nep-mic
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The Dark Side of Competitive Pressure (2005)
Working Paper: The Dark Side of Competitive Pressure (2002)
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