Tuesday, March 27, 2012
Posted by D. Daniel Sokol
Victor Manuel Bennett (USC Marshall School of Business), Lamar Pierce (Washington University in St. Louis), Jason A. Snyder (Anderson School of Management, University of California at Los Angeles) and Michael W. Toffel (Harvard Business School, Technology and Operations Management Unit) explore Competition and Illicit Quality.
ABSTRACT: Competition among firms can have many positive outcomes, including decreased prices and improved quality. Yet competition can have a darker side when firms can gain competitive advantage through illicit and corrupt activities. In this paper, we argue that competition can lead organizations to provide illicit quality that satisfies customer demand but violates laws and regulations and that this outcome is particularly likely when price competition is restricted. Using 28 million vehicle emissions tests from more than 11,000 facilities, we show that increased competition is associated with greater inspection leniency, a form of illicit quality that customers value but is illegal and socially costly. Firms with greater numbers of local competitors pass customers at considerably higher rates and are more likely to lose customers they fail to pass, suggesting that the alternatives that competition provides to customers intens! ify pressure to illegally provide leniency. We also show that, at least in contexts when pricing is restricted, firms use illicit quality as an entry strategy.