Competition and Misconduct

Abstract

Misconduct is widespread; practices such as mis-selling, pump&dump, and money laundering harm counterparties while raising profits. This paper presents a mechanism which can determine what sorts of misconduct can be sustained in competitive equilibrium in concentrated markets, oligopoly settings, and in markets with many small competing firms. The model studied allows general demand and makes a distinction in types of ethical dilemma using current psychological understanding. The paper shows, for example, that markets with many small competing firms are not vulnerable to misconduct if firms respond to entry with niche strategies or if the ethical dilemma draws an emotional response.