The benefits of cost system accuracy in a competitive price setting duopoly.

Abstract

This study reports the results of an experiment to investigate the value of increased cost report accuracy in competitive pricing decisions. Prior work has shown that in more competitive environments, cost system choice matters less since there is opportunity to learn from informative market signals. Our study argues that in a dynamic duopoly, learning from such informative market signals is distorted when decision makers act as market leaders deciding first on prices. Compared to second movers (followers), a leader with a biased cost report continues to prefer his own distorted cost figures over the informative signals emanating from better informed market players. Consequently he realizes lower performance and can be taken advantage of by opponents with access to superior cost data. We conclude that in order to achieve profit leadership, current reputational market leaders have a great interest in improving the accuracy of their own cost report system.Activity based costing; Choice; Competition; Data; Duopoly; Market;