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Too much data and too little time: optimally ignoring data in a Cournot duopoly

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The purpose of this study is to examine the acquisition of new information in a symmetric Cournot duopoly when this effort is limited by a firm's data processing capacity. While in the past useful data was often difficult and costly to obtain, many firms today are inundated with data about virtually any relevant business factor. Yet they often lack the necessary capacity, especially managerial capacity, to process these data into information, i.e., insights useful for decision-making. This capacity constraint raises the question whether and when it is optimal to focus the available capacity on processing data about a few business factors and ignore other factors. Alternatively, the firms can spread the available capacity to process some data about many business factors. The authors find that the likelihood or degree of a focused allocation is an increasing function of competition and resource effectiveness and a decreasing function of uncertainty. Since investments in information technology enhances the resource effectiveness, more investments should be associated with more focused strategies. The shift from costly data collection to limited data processing capacity has also significant implications for the acquisition of information. First, the equilibrium resource allocation can lead to information asymmetries because the a priori identical firms have an incentive to process data about different uncertain factors. Second, firms do not necessarily acquire information with the highest possible accuracy given the available data processing capacity. Both results are a consequence of a focused resource allocation.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2000/2000-85.pdf

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Copyright INSEAD. All rights reserved