Market feedback, cost system choice and competitve pricing: the advantage of not being a leader

Abstract

This study experimentally investigates the value of cost report accuracy in an interactive pricing context. Market agents received feedback about their own profits via either a volume-based costing or a more accurate activity-based costing report. They also received a typical market report containing the performance of their rivals. While prior work suggested that market discipline and learning from salient competitors can overcome performance decrements due to inaccurate costing, our results imply that the corrective nature of market feedback depends on the decision maker's role in the competitive play. Compared to other participants, decision makers endowed with the role of a 'reputational' market leader are less effective in screening available market feedback because they predominantly fixate on their own cost data. Even when receiving biased volume-based costing, reputational leaders ignore valuable market signals of opponents having access to more accurate cost data. Consequently other market players can take advantage of them.