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Chapter 14: 14PA (page 523)

A well-known conglomerate that manufactures a multitude of noncompeting consumer products instituted a corporate wide initiative to encourage the managers of its many divisions to share consumer demographic information. However, since the initiative was implemented, the CEO has noticed that less information is available than ever. Why do you think the CEO's plan backfired?

Short Answer

Expert verified

The CEO's plan is backfired because of the "free rider" problem.

Step by step solution

01

Public Good

Public goods are open for all citizens. Anyone can consume them without worsening others. Thus, they are non-excludable and non-rival.

02

Explanation of CEO’S plan

Collective gathering and sharing of information have similar characteristics to public goods. Everybody can use and values them, but not everyone is willing to participate in paying for them.

If the manager of one division expends effort gathering information and shares it, then other division managers benefit from that information without having to bear any of the costs.

Therefore, if all division managers think this way, the result is that minimal effort is spent within the firm on efforts to gather consumer demographic information. As a result, The CEO's plan is backfired.

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