“Side Payments in Marketing,” by John R. Hauser, Duncan I. Simester, and Birger Wernerfelt, Marketing Science Journal, Vol. 16, No. 3, 1997, http://bear.cba.ufl.edu/centers/MKS/abstracts/hausersimesterwernerfelt.html.
“In Random Regional Business – Reflexions,” by Collounsbury, Lounsbury on MENA, 19 April 2005.
Collounsbury continues to provide the best arguments in favor of bribery (at least in international markets) that I have heard. After discussing impacts of the Sarbanes-Oxley (anti-corruption) Bill, Col writes
One begins to wonder how publicly listed US firms will be able to compete in emerging markets where … ahem standard and legal practice departs from the increasingly absurdly prissy standards in the United States.
In particular, I draw attention to this observation:
“To those tempted to see this as American smugness, she points, in contrast, to sharply lower prosecution rates across much of Europe for similar international bribery cases. The problem is particularly acute in industries or regions of the world where a degree of modest generosity has always been seen as a polite way of building long-term relationships.”
Indeed, emerging US standards are absurd and cold in the context of where I am at
Bribery is interesting in the context of horizontal controls. It is clearly a form of strong (because money talks) explicit (because it is obvious) horizontal control. Becuase horizontal controls are preferable to vertical controls, it is questionable whether bribery should be a crime. Fortunately, a better solution than Sar-Ox may have been form: good horizontal management
Side payments, known politely as gainsharing and pejoratively as bribery, are prevalent in marketing. Indeed, many management schools have added ethics modules to their basic marketing courses to discuss these issues and there is much discussion of side payments in the literature (e.g., Adams 1995, Borrus 1995, Mauro 1997, Mohl 1996, Murphy 1995, Peterson 1996, and Rose-Ackerman 1996). We seek to provide insight with respect to one class of marketing side payments. We hope that our analyses clarify some of the issues and suggest how these side payments affect marketing activities.
We next show that the firm can anticipate these side payments and design a reward system to factor them out at no loss of profit. The intuition is straightforward. The firm first adjusts the marginal returns in the reward functions for sales support and for the salesforce such that they will each take the “optimal” actions even though they engage in side payments. Then the firm adjusts their fixed compensation so that the firm extracts its full profit. The proof is difficult because we must show that adjusted reward systems exist and we must show that they allow the full profit to be extracted.
Market-based solutions tend to be better than government solutions. Col is onto something.
Update: He comments further
Quickly from an internet cafe: I have no problem with sidepayments that are transparent and subject to disclosure. Obviously there has to be a line between criminal behaviour and greasing the wheels. People are people, and trying to run human interaction without a little grease only ends up criminalizing what should be open.
So long as there is disclosure, that should help keep keep distortion to a minimum, without overloading commerce with wrong headed regulation (and as you know, I am not against regulation per se, regulation is good when it is market making – which is more often than market purists admit, far less often than Big Gov people would have it either.)