Essays on Corruptible Markets, Strategic Certification and Online Peer Effects
Emerging markets offer significant business opportunities. However, local and foreign firms selling in these markets are often faced with corrupt agents. The first essay investigates the marketing strategy implications for firms competing for business in a corruptible market. We consider a setting in which a buyer (a firm or government) seeks to purchase a good through a corruptible agent. Supplier firms, that may or may not be a good fit, compete to be selected by the agent. Only the agent observes whether or not a firm is a good fit. Corruption arises due to incentive of the agent to select a non-deserving firm in exchange for bribes. Intuitively and as expected, a sufficiently large monitoring of the agent eradicates corruption. But the interesting point is that increasing the monitoring from an initial low level can backfire, making the agent more likely to select a non-deserving firm. As firms become reluctant to offer bribes in response to higher monitoring, it now becomes likely that the agent receives a bribe offer, in equilibrium, only from a non-deserving firm. This nonmonotonic agent behavior makes it difficult to reduce corruption. The implication is that the buyer should choose either to be ignorant or to take drastic measures to limit corruption. Further, We show that unilateral anti-corruption controls, such as the Foreign Corrupt Practices Act of 1977, on a U.S. firm seeking business in a corrupt foreign market can actually increase the profits of the U.S. firm. This is because such a control on the U.S. firm puts pressure on the buyer to set monitoring at higher levels and reduces corruption.
The second essay describes how market forces create incentives for firms to seek product safety certifications. We consider a firm which makes the decision of whether or not to seek certification prior to selling the product. Consumers choose to be careful or negligent while using the product. The probability of an accident depends on both the consumer's effort and the product safety. We show that, even when both the firm and consumers have same beliefs about the product safety, the presence of consumer moral hazard can create incentives for certification. Consumers' choice of effort may change as they update their beliefs upon observing a certification outcome. The consumer surplus that is thereby generated may be extracted by the firm through higher prices creating incentives for certification. Interestingly, if the certification decision is private information to the firm, the presence of consumer moral hazard may lead to more certification if safety and effort are substitutes but less certification if they are complements. If safety and effort are substitutes, a negligent product use hurts the consumer more when using a non-certified product compared to when using a certified product. This makes the certified product more valuable to the consumer. As a result, the certification equilibrium exists over a larger set of conditions. On the other hand, if safety and effort are complements, a negligent product use hurts the consumer more when using a certified product. The certified product becomes less valuable causing the certification equilibrium to exist over a smaller set of conditions.
The third essay empirically investigates the effect of consumers' product evaluations on the judgments of other consumers in an online setting. Consumers routinely get exposed to others' opinions, most often in the form of average of prior ratings, when reporting their own. It is not obvious if consumers incorporate these prominently displayed average ratings in their own evaluations. By use of movie ratings data from Netflix we find that consumers incorporate the average of the prior ratings displayed on screen in their evaluations. Simulations using the estimated parameter values indicate that this behavior changes the resulting pattern of the ratings. We also find that a small number of early extreme ratings has a long lasting impact on the average rating of a movie. Average ratings remain inflated even after 1000 periods when only the first 5 ratings are changed to the highest possible rating.