Coordinating Product Market Strategies Using Market Feedback

Abstract

We develop a model where firms learn from stock price movements about their product market competitors. The firm uses market feedback to adjust its best responses to its rivals' strategies, and these adjustments help to increase profits. We find consumers are worse off. To understand the role of information, we consider two scenarios: first, a public-private, and second, a public-public combination. We find firms are better off and consumers are worse off in the second relative to the first scenario. The informed investor earns less in the second scenario implying that, in equilibrium, she picks one stock to trade. We find market feedback is socially valuable. Our results have important normative implications: we highlight the partial irrelevance of direct regulatory efforts and the role of corporate taxes in mitigating consumers' resentments in a free-market economy.