According to the European Commission (2012), the informal economy accounts for about 19% and 50% of annual GDP for developed and emerging economies respectively. Despite this, the informal economy has received little attention in management research. Due to this lack of research on the informal economy, we have a very limited understanding about how firms compete in illegal markets. This study attempts to fill this gap by developing and testing a theoretical model about the competitive dynamics in the illegal economy. Particularly, this project focuses on the trading of illegal pharmaceutical drugs. According to the World Health Organization (WHO), the sale of illegal pharmaceuticals amounts to about 400€ billion annually (WHO, 2018). Furthermore, the WHO also estimates that up to 1 million people (250,000 being children) die globally because of counterfeit drugs.
The main objective of this project is to develop and test a conceptual model that explains the competitive dynamics in illegal markets. This project will focus on three specific competitive outcomes: (1) market entry decisions (i.e. entry by an illegal pharmacy into a particular drug-market) (2) price decisions (i.e. the price gap between drugs sold in illegal and legal pharmacies), and (3) illegal drug sales (i.e. the volume of illegal sales versus legal sales for each medicine).
To explain variance along these three competitive dimensions, we will develop our theoretical model around the concept of legitimacy. According to Suchman (1995), legitimacy is the perception that “actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995: 574). Our main conceptual proposition relies on the claim that the illegal trading of medical drugs will be perceived as more legitimate in those cases where individuals perceive that the existing laws and regulations are “unfair”. Specifically, we expect that illegal pharmacies are (1) more likely to enter new niches, (2) increase drug price and (3) achieve greater sales, when there is a greater perception among agents that illegal trade of such drugs is a legitimate activity and is justified from a moral standpoint.
To capture perceptions of legitimacy, we look at whether a certain law or regulation is perceived as unfair and unreasonably strict. Specifically, we will look at three laws: (1) prescription law, (2) manufacturing law and (3) intellectual property law. In each of these 3 laws there is a conflict between a value that is left in the legal side of the spectrum and another value that remains in the legal side: tension between patient safety versus patient privacy (prescription law), tension between patient safety and timely access for a drug (manufacturing law), and tension between rewarding innovators and drug affordability (intellectual property law). Accordingly, for each pharmaceutical drug, we argue that the more salient the value left in the illegal side is compared to the value remaining in the legal side, the more strict and unfair a regulation will be perceived, meaning that the more illegal trade will be perceived as a legitimate and morally justified activity.
In sum, the main objective is to show how perceptions of legitimacy explain illegal pharmacies’ decisions with respect to (1) new market entry, (2) prices and (3) sales.
