Customer-Driven Misconduct: How Competition Corrupts Business Practices

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....

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Bibliographic Details
Published in:Management science 2013-08, Vol.59 (8), p.1725-1742
Main Authors: Bennett, Victor Manuel, Pierce, Lamar, Snyder, Jason A., Toffel, Michael W.
Format: Article
Language:English
Subjects:
Air pollution
Automobiles
Automotive emissions
Brand loyalty
Business corruption
Business management
Competition
Competition (Economics)
Competitive advantage
Consumers
Corruption
Crime prevention
Customer services
Customers
Economic competition
Emissions control
Emissions testing
Enterprises
environment
Fraud
government
Inventory
judicial
Laws, regulations and rules
legal
Management science
Market competition
market structure and pricing
microeconomics
organizational studies
Political economy
Pollutant emissions
pollution
Pollution control
Prices
Quality of service
Regulation
regulations
Sharing economy
strategy
Studies
U.S.A
Vehicles
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Summary: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.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.1120.1680