Cost Analysis, Cost Reduction and Competition

Posted: 24 Aug 1998

See all articles by Stephen C. Hansen

Stephen C. Hansen

University of Southern Maine - School of Business

Abstract

Rising competition has been repeatedly mentioned as the reason many firms have invested in more extensive management accounting systems. I use a theoretical model to examine this link. In my model firms (1) determine how much cost data to collect and then estimate costs, (2) use the cost estimate to guide their cost reduction investments, and (3) produce and sell output in a Cournot market. Contrary to the common view, my main result shows that increasing the number of competitors leads to a decreased investment in cost reduction subsystems. The intuition is that as competition rises, each firm?s sales drop and any cost reduction investment can be recovered on fewer units. I also show that the highest cost firms need not invest the largest amounts in cost reduction. Finally I demonstrate that firm?s demand for cost data displays a U shape. As competition rises, firms first decrease, then increase their demand for cost data.

JEL Classification: M40, M46

Suggested Citation

Hansen, Stephen C., Cost Analysis, Cost Reduction and Competition. Available at SSRN: https://ssrn.com/abstract=117849

Stephen C. Hansen (Contact Author)

University of Southern Maine - School of Business ( email )

P.O. Box 9300
Portland, ME 04104
United States

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