Customer-Driven Misconduct: How Competition Corrupts Business Practices
Duke University - Fuqua School of Business; University of Southern California - Marshall School of Business
Washington University, Saint Louis - John M. Olin School of Business
University of California, Los Angeles (UCLA) - Anderson School of Management
Michael W. Toffel
Harvard Business School (HBS) - Technology & Operations Management Unit
October 8, 2012
Management Science 59 (8), 1725-1742
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.
Number of Pages in PDF File: 33Accepted Paper Series
Date posted: February 16, 2012 ; Last revised: December 11, 2013
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