The Benefit of More Accurate Product Cost Information in Imperfectly Competitive Markets : An Experimental Investigation

A recurring criticism of work relating to the impact of the accuracy of product cost information on firm profit is that many studies have ignored the cost of implementing or improving a cost reporting system. Second, previous studies have been set in monopolistic (Gupta and King 1994) or competitive (Berg and Sprinkle 1995) markets. This study investigates the impact of costly product costing systems in the context of imperfectly competitive market structures. We employ a laboratory markets design to demonstrate that the value of more accurate product cost information is dependent upon the characteristics of the firm's competitive market environment. In a controlled environment, the benefits of a more accurate cost system can be measured. Specifically, our study extends the product costing literature by examining the benefit provided by more accurate product cost information under differing levels of product substitutability and correlated cost structures within the market settings of Cournot (cost leadership) and Bertrand (product differentiation) competition. We find that the benefit of more accurate product cost information, in terms of increased profit to the firm, is greatest in markets where the substitutability of the products is high. Given high substitutability of the products, the benefit is greater under Bertrand competition than Cournot competition. The correlation of the firms' costs do not significantly impact the benefit received from more accurate product cost information