The Market Provision of Management Services, Information Asymmetries and Service Quality—Some Market Solutions: an Empirical Example
| Published date | 01 December 1993 |
| Date | 01 December 1993 |
| DOI | http://doi.org/10.1111/j.1467-8551.1993.tb00061.x |
| Author | Timothy Clark |
British Journal
of
Management, Vol. 4,235-251 (1993)
The Market Provision of Management Services,
Information Asymmetries
and
Service
Quality-
Some Market Solutions:
an
Empirical Example
Timothy
Clark
School
of
Management, The Open University, Walton Hall, Milton Keynes, MK7
6AA
SUMMARY This article examines the problems of information asymmetry associated with the market
provision of managerial services. Such problems are heightened by those characteristics
which differentiate services from goods. Two unique, and central, characteristics of
services, are intangibility and perishability. These create special problems for the market
provision of services.
In
particular they make for difficulties in assessing quality; whereas
the producer may know product quality, the buyer often does not. The asymmetry
between sellers and buyers is of two types: Adverse selection and moral hazard. Adverse
selection occurs when the buyer cannot observe the relevant characteristics of the seller
or the conditions under which they work. The problem of moral hazard is the buyer’s
inability to observe the action taken by the sellers.
If
these
difficulties
are not overcome,
the market could collapse as companies withdraw and internalize service provision.
However, each market has a number of in-built mechanisms which remedy the harmful
effects associated with information-related problems. The institutional arrangements
which predominate in particular markets are dependent
upon
the trust-producing mecha-
nisms within those markets. Consequently, market responses to information asymmetries
are far from uniform. The argument is illustrated using the example of the executive
recruitment industry.
In
this respect the paper is a highly focused study of those mecha-
nisms which overcome information asymmetries in one service market.
Introduction
A
number of studies have indicated that certain
managerial functions are increasingly being per-
formed by external consultancies (BIM, 1987;
Clark
et al.,
1989; Torrington and Mackay, 1986).
Functions sensitive to the encroachment of external
consultancies include marketing, training and rec-
ruitment, for example. The factors underlying the
‘externalization’; of such functions have been well
examined elsewhere (Clark and Clark, 1990; Perry,
1992). This article is concerned with the problems
of information asymmetry associated with the mar-
ket provision of managerial services. These prob-
lems arise from the characteristics of services.
Services differ from goods in a number of important
respects: Services are intangible and
so
quality is
difficult to observe and measure; services are perish-
able and
so
cannot be stored; services are not stan-
dardized implying the appropriateness of a service
is difficult to verify; service production is inherently
social resulting in the inseparability of production
and consumption. Characteristics such as these
create special problems for the market provision
of
services. The major difficulty is that the quality
of service provision is difficult to assess; whereas
the producer may know product quality, the buyer
often does not. This asymmetry of information
between sellers and buyers of services creates prob-
lems for their market provision. If these difficulties
are not overcome the market could collapse as com-
panies withdraw and internalize service provision.
In order to overcome these quality assurance prob-
lems it would be expected that formal regulatory
1045-31
72/93/040235-17$13.50
0
1993
by
John
Wiley
&
Sons,
Ltd.
Received
4
December 1991
Revised 19
January
1993
236
T. Clark
mechanisms would dominate within the service
markets. Following Holmstrom (1985), this article
suggests a number of market remedies which reduce
information asymmetries and provide incentives to
ensure high quality. These are discussed with refer-
ence to the executive recruitment industry. It con-
cludes that informal rather than formal regulatory
mechanisms predominate. This is due to the closed
structure resulting from the continual fragmen-
tation of existing consultancies.
The article divides into six parts. In the first,
the methods by which the empirical data were col-
lected are outlined and some general findings pre-
sented. The second, identifies the most commonly
distinguished service characteristics. The third
describes a number of structural features
of
the
industry which impinge on the subsequent discus-
sion. The fourth outlines the two major sources
of information asymmetry within service markets:
Adverse selection and moral hazard. The fifth sec-
tion suggests a number of market mechanisms
which may alleviate the potentially harmful effects
of information related problems utilizing the empir-
ical example of the executive recruitment industry.
The final section argues that the response of differ-
ent markets to these informational problems is not
uniform. The market remedies which overcome
informational problems are related to the trust-pro-
ducing mechanisms within any particular market
(Zucker, 1986). This argument is again illustrated
with reference to the executive recruitment indus-
try.
Research Background
The empirical results presented in this article draw
on two questionnaire surveys. The first was directed
at all
UK
executive recruitment consultancies. The
industry was identified by a supply side measure
of ‘substitutability’ termed the ‘closed loop’
method, which was developed specifically for the
purpose. Several hundred consultancies were
initially identified through their entries in a number
of industry directories. As a precursor to the ques-
tionnaire survey each of these consultancies was
identified
for
a list of their competitors. This was
repeated with each newly identified consultancy
until a closed loop was achieved (that is, no new
consultancies were identified). The questionnaire
was then sent to all consultancies thus identified.
The second questionnaire was mailed to the corpor-
ate personnel directors in
The Times
100
UK
Com-
panies.
Response rates of 42 per cent and 55 per
cent were achieved respectively. Subsequently,
72
structured face-to-face interviews were conducted
with executive recruitment consultancies and per-
sonnel directors to supplement the information
obtained from the questionnaire surveys.
Before proceeding with
a
brief outline of the
research aims and findings, executive search and
selection must first be defined. The former involves
the identification of candidates through direct and
personal contact and tends to be proactive. The
latter is the recruitment of potential candidates by
recruitment advertising and tends to be reactive.
The overall aim of the research was
to
examine
the development of the
UK
executive search and
selection industry over the past
30
years within the
structurexonduct-performance (SCP) paradigm.
The attractiveness of the SCP approach lies mainly
in its use as a method of categorizing different
industries. A number of empirical investigations
into service industries have, either explicitly or
implicitly, adopted the SCP categorization schema.
Examples include accountancy (Daniels
et
al.,
1988; Hallett and Bishop, 1991), estate agents (Die-
trich and Holmes, 1991), funeral services
(Saunders, 1991), and insurance (Aaronovitch and
Sampson, 1977; Franklin and Woodhead, 1980).
The SCP paradigm, at its simplest, postulates a cau-
sal relationship between the
structure
of a market
(i.e. number of firms, entry barriers, economies of
scale) and the conduct of firms in such markets (e.g.
pricing policies, advertising policies, etc.) which,
in turn, results in a particular
performance
(i.e. pro-
fitability, technological progressiveness). The SCP
approach, in this form, argues that performance
is determined by the conduct of the firms, which
in turn is determined by the structural characteris-
tics
of
the market. The SCP paradigm tends to
argue that the degree of competition is dependent
upon the number of firms in an industry, with pure
competition occurring only in an industry where
there are so many firms no single firm can influence
the price of its product. The degree of monopoly
power increases as the number of firms declines
within an industry. This is measured within the SCP
paradigm by the degree of total industry output
concentrated in a few producers. In general the
policy implications of SCP are that consumers are
best served by a market which is as close to perfect
competition as it practicable; by contrast the con-
sumers’ position is threatened by the dual processes
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