The Dark Side of Competitive Pressure

35 Pages Posted: 15 Jan 2003

See all articles by Jason G. Cummins

Jason G. Cummins

Brevan Howard Asset Management LLP

Ingmar Nyman

City University of New York, CUNY Hunter College - Department of Economics

Date Written: September 2002

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: Competition, information aggregation, incentives

JEL Classification: D20, D40, D82

Suggested Citation

Cummins, Jason Gustav and Nyman, Ingmar, The Dark Side of Competitive Pressure (September 2002). FEDS Working Paper No. 2002-43. Available at SSRN: https://ssrn.com/abstract=338001 or http://dx.doi.org/10.2139/ssrn.338001

Jason Gustav Cummins (Contact Author)

Brevan Howard Asset Management LLP ( email )

London, SW1Y 6XA
United Kingdom

Ingmar Nyman

City University of New York, CUNY Hunter College - Department of Economics ( email )

695 Park Avenue
New York, NY 10021
United States

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