Misconduct and Innovation as a Response to Global Competitive Pressure

Abstract

This article theoretically examines the effect of an intensified global competition. Since consumers observe product quality imperfectly, inefficient firms are incentivized to supply less valuable goods deceptively, which spreads consumers’ distrust of the market. On the other hand, escaping its negative externality, efficient firms undertake innovation to build trust with consumers. Using a model that describes this market dynamism, this article shows that in some circumstances, the intense competition negatively affects average domestic product quality, social welfare, and, inequality across firms.