Ideas for Leaders #397

How Competition for Customers Causes Unethical Behaviour

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Key Concept

Do you encourage a culture of competition in your organization in order to motivate your employees? This Idea shows that doing so may also promote corruption and unethical behaviour. In the face of local competition, firms operating in the New York air-pollution testing industry were found to be more likely to behave unethically. Read on to find out the implications of this finding for your organization.

Idea Summary

Competition has traditionally received much praise, particularly from economists who point to its contributions in lowering market prices and also improving the quality of goods and services. However, recent research from schools including Marshall School of Business and UCLA Anderson School of Management has shown that intense competition can in fact naturally lead to unethical behaviour. Focusing on the automobile smog-testing industry, Victor Bennett led a study that found that, despite its plus points, sometimes competition can actually lead to corruption.

“There’s a strong sentiment that competition is a positive thing,” says Bennett. “It makes firms more efficient, makes service quality and products better and drives down prices. But it works through giving customers what they want, and sometimes doing so is bad for others.”

They looked at just over 28 million emissions tests from smog check facilities in New York— one of the US states required by the federal Environmental Protection Agency to institute vehicle emissions testing programs. This system tests for excessive carbon monoxide, hydrocarbons, nitrogen oxides, and for any other problem that might eventually lead to elevated emissions levels. These testing programs have been outsourced to the private sector, though those conducting tests are required to charge the same fixed price for the service; as such, they cannot compete for business through price and must do so on the basis of quality.

Primarily, Bennett et al looked at whether increased competition was associated with a greater likelihood of testing results being fraudulently manipulated. Indeed, they found that vehicles were much more likely to pass tests if they were tested at a facility that was located near a competitor. In other words, companies were more likely to be lenient where perhaps the cars should actually have failed tests in the face of local competition. 

They also found that the impact of competition does not necessarily affect all firms equally; new entrants, for example, are more likely to respond to competitive pressures. 

Though this study examined a particular industry in the US, these findings will have implications for other types of organizations as well. Managers can take note of these findings to avoid creating a culture of corruption in their organization — discussed further below.

Business Application

The findings by Bennett et al suggest that a firm’s misconduct can increase with the threat of competition, particularly in situations where price competition is restricted. Often, managers foster a culture of competition in order to motivate employees, but according to this study, this may instead induce unethical behaviour. As such, managers should strengthen monitoring and governance mechanisms in cases where market competition is high, as ultimately if their employees engage in unethical behaviour it may put their organization as a whole at risk for legal sanctions and/or loss of reputation.

They also need to be aware of the possibility that competitors could be behaving unethically in the name of competition and keep an eye on them. Otherwise, rival firms may gain advantage through illicit strategies, particularly if regulatory monitoring or enforcement in that industry is weak.

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