Managers like to think well of themselves, and of the firms that employ them. However, positive illusions can bias a manager’s evaluation of market outcomes, self-servingly crediting success on the superior quality of one’s own product but blaming failure on the aggressive price of a competitor’s offering.
Driving this prediction is the basic idea that individuals are more likely to ascribe good outcomes to forces under one’s control, and bad outcomes to forces outside of one’s control. In this study, Marco Bertini, Daniel Halbheer, and Oded Koenigsberg suggest and find evidence that price and quality serve this psychological motivation in differing ways.
Their discussion is as follows: Product quality is a defining feature of the firm. A manager’s decision to improve quality is perceived to reflect the core competence of the organization and engage the identity and values of its employees. Put differently, what the firm sells is often regarded as an integral part of what the firm is and who its people are. Quality is also controllable and stable. For these reasons, attributing success in the market to the superior quality of one’s product enhances the manager’s perception of the self and of the firm: positive outcomes are caused by our actions.
Price, however, is often equated to “market conditions.” Pricing is seldom considered a core competence of the organization, and thus sits at the fringes. After all, there are many moving parts to figure out, in particular the behaviors of external agents such as customers and competitors. Pricing decisions are characteristically hard to get right. Yet, price is easy to change at short notice. For these reasons, attributing failure in the market to the aggressive price of a competitor’s offering sustains the manager’s perception of the self and of the firm: negative outcomes are caused by the actions of others.
One experiment and one survey offer empirical evidence that supports their concept of self-serving behavior: Managers who experience sales that exceed expectations respond by increasing product quality and making only minor corrections to price. In contrast, managers who experience sales that lag expectations respond by decreasing price and making only minor corrections to product quality.
Taking this managerial psychology into account, the authors study the profit impact of self-serving behavior and identify conditions under which it increases or decreases firm profitability.