Shmuel Nitzan, Department of Economics, Bar Ilan University

Kobi Kriesler, Department of Economics, Bar Ilan University

Abstract

Competitive clubs offer their members the chance of receiving some reward by being selected by some agent - the selector. The reward can be associated with a certain position, status, prize or the selling of some good or (professional) service. This paper focuses on the effect of bounded rationality of the selector (consumer, committee, political leader or the government), which takes the form of fixed random sampling of club members, on the size, transparency and quality of self- governing and decentralized competitive clubs. It is shown that existing club members may actually benefit from increased competition, namely, from admission of new club members. This in turn may cause quality deterioration in both self-governing and decentralized clubs. If the competitive club can control the information on the quality of its members, a self-governing club avoids dissemination of such information while a decentralized club reveals as much information as it can. From the selector's point of view, the decisions of competitive clubs are disadvantageous. We conclude by illustrating the significance of the results by discussing self- governing clubs, like a club of doctors and by examining a decentralized club, like TV channels and the phenomenon of consumer-good branding.

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