Customer-Driven Misconduct: How Competition Corrupts Business Practices

Victor Manuel Bennett (), Lamar Pierce (), Jason A. Snyder () and Michael W. Toffel ()
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Victor Manuel Bennett: Marshall School of Business, University of Southern California, Los Angeles, California 90089
Lamar Pierce: Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130
Jason A. Snyder: Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Michael W. Toffel: Harvard Business School, Harvard University, Boston, Massachusetts 02163

Management Science, 2013, vol. 59, issue 8, 1725-1742

Abstract: Competition among firms yields many benefits but can also encourage firms to engage in corrupt or unethical activities. We argue that competition can lead organizations to provide services that customers demand but that violate government regulations, especially 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 service quality attribute that customers value but is illegal and socially costly. Firms with more competitors pass customer vehicles at higher rates and are more likely to lose customers whom they fail, suggesting that competition intensifies pressure on facilities to provide illegal leniency. We also show that, at least in markets in which pricing is restricted, firms use corrupt and unethical practices as an entry strategy. This paper was accepted by Bruno Cassiman, business strategy.

Keywords: environment; pollution; government; regulations; judicial; legal; crime prevention; organizational studies; strategy; microeconomics; market structure and pricing (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

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