Competitive Irrationality : the Influence of Moral Philosophy

This study explores a phenomenon that has been shown to adversely affect managers' decisions—competitive irrationality. Managers are irrationally competitive in their decisions when they focus on damaging the profits of competitors, rather than improving their own profit performance Studies by Armstrong and Collopy (1996) and Griffith and Rust (1997) suggest that the phenoixiGnon is cominon but not universal. WG examine the Question of why some individuals exhibit competitive irrationality when making decisions, while others do not by focusing on four aspects of moral philosophy—deontological orientation, cognitive moral development , idealism, and relativism Results suggest that individuals high in deontological orientation, high in cognitive moral development, high in idealism, and low in relativism will be less competitively irrational than those who are not Research suggests that people's moral philosophies influence their ethical norms, which in turn influence the choices they make when faced with ethical conflicts (Allen and Davis, 1993; Cyriac and Dharmaraj. 1994; Ferrel, Gresham, and Fraedrich, 1989; Gibson, 2000; Hunt and Vitell, 1986, 1993; Trevino, 1986). An individual's "moral philosophy," as used here, may range from a highly developed, formal code of ethics to a loosely connected set of moral inclinations, attitudes, or predispositions. Research also indicates that people often disagree as to whether a given situation involves an ethical issue to which their ethical norms should be applied (Bone and Cory. 1998; Sparks and Hunt, 1998), and whether a potential ethical issue is severe enough to warrant applying their ethical norms in the decision-making process (Frey, 2000; Jones, 1991). As a result, when decision-makers are faced with the same situation, some will incorporate their ethical norms into the decision-making process, while others will not. Consider the case of managers incorporating ethical norms in their managerial decision-making. If there is a conventional wisdom, it is that incorporating ethical norms in managerial decision-making decreases firm profits. This line of reasoning is implied by research that views unethical choices as resulting from an inherent conflict of interest between ethics and firm profitability (e.g.. Hoffman, Couch, and Lamont, 1998). s Ethics Quarterly. Volume 12. Issue 3. ISSN 1052-150X. 280 BUSINESS ETHICS QUARTERLY However, there are reasons to believe that individuals who consistently incorporate ethical norms into their decision-making processes may routinely make decisions that are favorable to firm profitability. The concept of "favorable" here, it should be noted, goes beyond the notion that "good firm ethics are good business" (i.e., that ethical firms will be rewarded by, say, consumer patronage). Rather, we posit that certain attributes of a distinctly moral character that are useful for making decisions in ethical contexts may also allow people to make superior decisions (i.e., decisions more profitable for the firm) in situations that do not have (an obvious) ethical content. Consider the issue of competitive irrationality. Managers are irrationally competitive when they focus on damaging the profits of competitors, rather than improving their own profit performance. For example, Armstrong and Collopy (1996) found that approximately 40% of the subjects in numerous pricing studies are irrationally competitive in that they tend to sacrifice their own firms' profits—both shortand long-term—in order to harm a competitor. Similarly, Griffith and Rust's (1997) study of competitive pricing reveals that many subjects tend to sacrifice profits for relative standing among firms, even when they are instructed explicitly to maximize profits and are compensated based on profits. As is suggested by Armstrong and Collopy (1996) and Griffith and Rust (1997), this phenomenon can translate into lost profits for the firm. However, this strategy can also cause other problems. For example, competitively irrational pricing may be viewed by the Justice Department as predatory and a violation of Section 2 of the Sherman Act (Werner, 1989). Also, competitive irrationality may have a negative effect on consumer welfare. To the extent that competitors focus on mutual destruction, rather than on being innovative and providing superior value, consumers lose. When choosing business strategies managers examine many factors (e.g., actions of competitors, behavior of consumers, etc.). In so doing, it is assumed that (absent compelling reasons to the contrary) managers act in the best financial interests of their firms. That is, managers' decisions are designed to increase the profits of their firms by increasing sales, reducing costs, etc. However, in the case of competitive irrationality, the goal of harming the competitor becomes paramount and the goal of increasing firms' profits becomes secondary. The decision-makers do not view their behaviors as being irrational. On the contrary, they believe that they are being highly rational. We argue that the decision-making processes of managers who adhere to certain moral philosophies allow them to perceive the irrationality of strategies that harm both the competitor and their own firm when other, more profitable, alternatives exist. We suggest that certain moral philosophies may make decision-makers more sensitive to potential ethical content that may exist in strategic decisions. In short, we maintain that the phenomenon of competitive irrationality can be at least partially explained by differences in moral philosophy. Specifically, we hypothesize that those individuals who are high in deontological COMPETITIVE IRRATIONALITY 28] orientation, high in cognitive moral development, high in idealism, and low in relativism will be less competitively irrational in pricing than those who are not. Our paper is organized as follows. First, we review the phenomenon of competitive irrationality. We then review four aspects of moral philosophy (cognitive moral development, deontological orientation, idealism, and relativism) and develop hypotheses for each variable. Next we test the hypotheses on a nonprobabilistic sample of 350 individuals who have at least 3 years business experience. Finally, we discuss the implications of our findings. Competitive Irrationality All managers will at times make poor decisions. Why, however, are some managers' "hit rates" consistently worse than others? One stream of research provides a provocative answer: Managers who are irrationally competitive make poor decisions (Armstrong and Collopy, 1996; Griffith and Rust, 1997). Firms, of course, are often harmed by the actions of competitors. For example, if a firm introduces a new product at competitive prices that performs better than its rivals, then rival firms" sales and profits will likely be affected. However, dynamic theories of competition imply that the harm to competitors is, or ought to be, a by-product of the process of competition, not its focus (Dickson. 1992, 1996; Hunt, 2000; Hunt and Morgan, 1995, 1996, 1997). As to the nature of competition, for example, resource-advantage ("R-A") theory maintains that competition consists of the constant struggle among firms for comparative advantages in resources that will yield marketplace positions of competitive advantage and, thereby, superior financial performance. When firms have positions of competitive advantage, rivals will attempt to neutralize and/or leapfrog the resources of advantaged firms through acquisition, imitation, substitution, or major innovation (Hunt and Morgan, 1995). The goal is superior financial performance, not harming competitors. But, "superior'" financial performance differs from profit maximization: Though economic "agent[s] prefer more to less all things considered," this "differs from maximizing in any strong sense"' (Langlois, 1986: 252). Indeed, R-A theory argues that, though more profits are preferred to less profits, the fact of imperfect information, among other things, categorically prevents firms from profit maximizing: Because superior equates with both more than and better than, it implies that firms seek a level of performance exceeding some referent. For example, the specific measure of financial performance might be profits, return on assets, or return on equity, whereas the specific referent might be the firm's own performance in a previous time period or that of a set of rival firms, an industry average, or a stock-market average Both the specific measure and referent will vary from time to time, firm to firm, industry to industry, and culture to culture (italics in original) (Hunt and Morgan. 1997; 78). 282 BUSINESS ETHICS QUARTERLY Therefore, explicating "superior financial performance" calls for "empirical research on the measures and referents that managers actually employ" (Hunt and Morgan, 1997: 78). The empirical research on competitive irrationality suggests that some managers view "competition" and "performance" in a dysfunctional manner: Irrationally competitive decision-makers adopt alternatives that sacrifice both the short-term and long-term profits of their firms in order to inflict significant harm on a competitor (their referent). Competitive irrationality, all studies acknowledge, is far from universal. Indeed, though Armstrong and Collopy (1996) find almost 40% of their subjects to be making irrationally competitive pricing decisions, most of their subjects choose competitively rational alternatives. Competitive rationality, argue Griffith and Rust (1997), implies that some managers must learn that there are times when they should be tolerant of competitors' successes. As to why some managers have not learned this lesson, Armstrong and Collopy (1996) suggest that the marketing and business strategy literatures have fostered competitive irrationality by the indiscriminate use of the warfare metaphor. The implication of "competition is war," for some, is that competition is an adversarial, zero-sum game, whose purpose is to destroy competitors. However, all of their subjects were exposed to the warfare metaphor and other theories concerning the nature of competition and performance. Why, then, did some exhibit competitive irrationality, while others did not? The decision-making literatures in the areas of organizations (Weick, 1979) and of ethics (Rest, 1986a,b) suggest that examining the process that individuals use to make decisions is the place to start. Studies suggest that even when decisions are made in a group setting, they are often influenced by the individual characteristics of the group members (Chandrashekaran et al., 1996; Dawes et al., 1998; McQuiston and Dickson, 1991; Venkatesh et al., 1995). In particular, these literatures suggest that one should focus on the characteristics of decision-makers that influence how they evaluate and interpret information. Thus, this study can be viewed as representing an initial step toward understanding the factors that influence competitive irrationality by focusing on individual differences related to moral philosophy. We posit that moral philosophy can contribute to a better understanding of this dysfunctional phenomenon.