IE ERC Grant in Management Sciences – ILLEGALPHARMA The challenges of understanding the patterns that govern Competition in the Informal Economy. (I - Data)
17 May 2019

Research in management has concentrated in developing theories explaining the Competitive Dynamics of markets focused on addressing three dimensions of the economy: Market Entry, Prices, and Quality[1].  The various theories developed on Competition, Strategic Capabilities, Competitive Advantage, etc. refer in all cases to the formal side of the economy. But, is what we know about firms’ Competitive Dynamics applicable to the informal side of the economy?


The study proposed by Professor Luis Diestre in his project funded by the EU ERC Grant (GA Nº  715536 -ILLEGALPHARMA-), aims at understanding illegal trade by building a new theory for the Competitive Dynamics in the informal market, drawing from Legitimacy Theory to develop such conceptual model. 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”[2]. Studies in the formal side of the economy have argued that Legitimacy plays a key role in explaining firms’ Competitive Dynamics[3]. Yet, the question is, does Legitimacy play a key role in explaining the informal side of the economy as well?


This study builds on the idea that illegal activities could still enjoy high levels of legitimacy and that this could explain several dimensions of the competitive dynamics in the informal economy such as new market entry, price decisions and product quality. Exploring this, however, implies facing an important challenge: data availability.  Informal transactions happen in the dark, leaving little or no trace. This makes very difficult for researchers to collect valuable data that could support the construction of robust models for scientific analysis[4].  


Professor Diestre´s ERC Grant is focusing on a unique and very relevant illegal trading that gives the opportunity to overcome this limitation: the illegal trade of pharmaceutical drugs in the United States market. The National Association of Boards of Pharmacy in the United States ( provides a list of illegal online pharmacies operating in the U.S. market.  This offers a unique possibility to identify a relevant sample of actors operating in the informal pharmaceutical market, and examine whether perceptions of legitimacy determine their presence in the illegal market.


The proposed study could not be more relevant. Illegal drugs account for more than 10% of the medicines market and over €30 billion in annual earnings (World Health Organization, 2003). Pharmaceutical trade is a context where perceptions of legitimacy seem to play a very relevant role in many developed countries. Particular in the U. S., this is evidenced by the fact that several governors and majors in the U.S. encouraged citizens that cannot afford acquiring medicines for life-threatening conditions to illegally acquire them from outside U.S. borders (FDA, 2003). Such politicians clearly respond to a broadly spread perception that illegal purchasing of drugs is a legitimate act in certain circumstances.


Dr. Diestre’s main proposition is that the degree in which actors perceive the sale of an illegal product as a more or less legitimate activity, will influence:  (1) entrepreneurs’ decision to illegally enter such market (market entry), (2) consumers’ willingness to pay for such illegal product (price) and (3) manufacturers’ motivation to keep quality standards for that illegal product (quality). Perceptions of legitimacy is the basis around which this study will develop a theory to explain all these different outcomes.  The main proposition is that when agents perceive that the regulatory requirements are unfair (i.e. too restrictive), they are more likely to perceive that trading illegal products is legitimate and perfectly justified from a moral standpoint. Specifically, it explores perceptions that legal requirements are too restrictive in the following regulations: a)  Manufacturing (regulation that determines the conditions under which a facility can produce a certain drug);  b) Consumer Prescription (regulation that specifies what consumers can take a particular drug);  and c) Intellectual property (regulation that determines which manufacturers can produce a specific drugs). 


The main challenge of this project is  the construction of a database that allows to undertake a robust empirical and econometrical strategy to test the suggested relationships. Through the collection of data so far, there is a first relevant finding related to the variety of “illegal” actors in the U.S. illegal pharmaceutical  market (i.e.,  while some actors offer products that appear to be medicines that are legal in the country of origin, others offer medicines that are illegal even in the country of origin).  So the next step is the creation of categories corresponding to the levels of “illegality” as a way to construct a broader and more robust empirical strategy in order to obtain more reliable evidence. The conclusions that will be obtained from this project (focused on the illegal trade of pharmaceuticals) could apply to other empirical contexts as well.  The fact that there are significant differences among countries when it comes to the extent to which society cares about certain values does not mean that the proposed mechanism (legitimacy) is not at place, but simply that it works differently to the extent that the conflict between values is not identical across countries. Differences in the way in which privacy, timely access, and affordability values are perceived could actually explain variation across countries’ informal economies. If data becomes available, such a cross-country analysis would be very helpful to understand the scope and boundary conditions of the proposed theoretical model.




[1] Cho and Pucik, 2005; Simon, 2005; York and Lenox, 2013.

[2] Suchman, 1995: 574

[3] Webb et al. (2009

[4] The few management studies that have been undertaken on this topic, have been either conceptual studies or empirical papers relying on case study and ethnographic methodologies.