Competitive Vices

In markets, firms must compete following a set of rules determined by laws, regulations, and social practices or pressures. This article investigates the effect of the degree of competition on the extent to which firms invest in behaving according to the rules of the marketplace. The authors model investments in following these rules as increasing the firm's marginal costs of production and decreasing its probability of being caught violating the market rules (and thus losing profits). They show that greater competition leads to smaller investments in following the market rules. This leads to (1) the existence of a social optimum degree of competition that is less than perfect competition and (2) more competition in general, thus prompting greater optimal monitoring efforts. Stricter market rules can lead to greater investments in satisfying the market rules and to lower production. The authors also present results on the likelihood of firms having broken the market rules depending on relative market shares, optimal monitoring, and the effect of dynamics on the incentives to satisfy the market rules.

[1]  Ernesto DAL BÓ,et al.  Self-Esteem, Moral Capital, and Wrongdoing , 2008 .

[2]  Louis Kaplow,et al.  Moral Rules, the Moral Sentiments, and Behavior: Toward a Theory of an Optimal Moral System , 2007, Journal of Political Economy.

[3]  Qiao Liu,et al.  Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms , 2009 .

[4]  C. Shapiro,et al.  Equilibrium Unemployment as a Worker Discipline Device , 1984 .

[5]  Lamar Pierce,et al.  Customer-Driven Misconduct: How Competition Corrupts Business Practices , 2012, Manag. Sci..

[6]  D. Newbery,et al.  Preemptive Patenting and the Persistence of Monopoly , 1982 .

[7]  C. Narasimhan.  Competitive Promotional Strategies , 1988 .

[8]  Louis Kaplow,et al.  A Model of the Optimal Complexity of Legal Rules , 1995 .

[9]  Loren Fox,et al.  Enron: The Rise and Fall , 2002 .

[10]  Janet L. Yellen.  Efficiency Wage Models of Unemployment , 1995 .

[11]  Natalie Mizik,et al.  The Theory and Practice of Myopic Management , 2009 .

[12]  M. Josephson.  The robber barons : the great American capitalists, 1861-1901 , 1962 .

[13]  Xueming Luo,et al.  Corporate Social Responsibility, Customer Satisfaction, and Market Value , 2006 .

[14]  Miklos Sarvary,et al.  R&D, Marketing, and the Success of Next-Generation Products , 2003 .

[15]  Ty Henderson,et al.  Embedded Premium Promotion: Why It Works and How to Make It More Effective , 2007 .

[16]  Jennifer F. Reinganum.  Uncertain Innovation and the Persistence of Monopoly , 1982 .

[17]  G. Tabellini.  The Scope of Cooperation: Values and Incentives , 2007 .

[18]  H. Varian.  A Model of Sales , 1980 .

[19]  George A. Akerlof.  Labor Contracts as Partial Gift Exchange , 1982 .

[20]  C. Bhattacharya,et al.  Does Doing Good Always Lead to Doing Better? Consumer Reactions to Corporate Social Responsibility , 2001 .

[21]  Jason A. Snyder.  Gaming the Liver Transplant Market , 2010 .

[22]  Patricia M. Dechow,et al.  Executive incentives and the horizon problem: An empirical investigation , 1991 .

[23]  Robert W. Rosenthal,et al.  A Model in Which an Increase in the Number of Sellers Leads to a Higher Price , 1980 .

[24]  P. Dasgupta,et al.  Uncertainty, Industrial Structure, and the Speed of R&D , 1980 .

[25]  Leif D. Nelson,et al.  Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving , 2010, Science.

[26]  H. P. Sims,et al.  Some Determinants of Unethical Decision Behavior: An Experiment , 1978 .

[27]  D. P. Baron,et al.  Morally Motivated Self-Regulation , 2010 .