Summary of JOIE article (22 November 2022) by Erwin Dekker, Mercatus Center at George Mason University, Fairfax, The United States, and Julien Gradoz, Clersé, Université de Lille, Lille, France. The full article is available on the JOIE website.
In the United States, marijuana has been legalized in several states. But many banks, nonetheless, refuse to let entrepreneurs in the industry to open bank accounts, they limit access to credit cards payments and reject credit applications. Even when banks accept marijuana shops as customers, they charge a premium for their services. The reason is that there is still significant moral disapproval of marijuana among significant groups in society. Although legal barriers have been removed, the moral barrier has remained in place.
This moral disapproval is called repugnance in economics, and it has important effects on how the economy functions. Marijuana shops, like sex-shops for instance, rely more heavily on cash transactions than regular businesses, which makes them an attractive target for robbers. They are also typically banned from malls and other prime locations downtown. Our paper provides the first systematic analysis of the effects of repugnance on firm behavior.
Repugnance is a socially constructed disapproval of market transactions expressed in moral terms by third parties. Third parties experience a moral externality which consists of “mental suffering” resulting from ordinary allocation in the market. Faced with this moral externality, they can push for regulation or try to ban the transactions altogether. But, when their effort at regulation fail, they might instead opt for the mobilization of repugnance. If they succeed the firm, for instance the marijuana shop, is faced with a stigma. The stigmatization results in increased transaction costs for repugnant firms. Several strategies for firms to deal with stigma have been identified in the management literature. These strategies include specialization to avoid that stigma impacts unproblematic activities, concealment to avoid social disapproval and de-stigmatization, an attempt to challenge the moral beliefs. Our paper provides an integrated framework based on transaction costs for thinking about the choice of these strategies. We illustrate these effects through two case-studies.
In our first case study on MindGeek, we study the strategies adopted by the firm in a static setting. MindGeek was founded in 2004 and has been stigmatized repeatedly over the past decade. The firm exhibits a high degree of vertical and lateral integration. It possesses a dozen pornographic websites (Pornhub, RedTube, YouPorn…), movie studios (Babes.com, Brazzers, Men.com…), an online advertising device (TrafficJunky), a branch devoted to statistics, a music label (Pornhub records) and several other activities. We argue that integration is a response to stigmatization. Potential partners incur a premium to deal with this firm, primarily to avoid being ‘infected’ by the stigma, but also because they might directly feel the repugnance associated with this activity. This situation increases costs of using the market and makes in-house production more attractive for the firm. Notably, we focus on the difficulties to rely on financial intermediaries, the difficulties to find firms willing to advertise on the platforms and places to advertise their own brands. All these difficulties increased the lateral and vertical integration of the firm. More than integration, MindGeek broadened the scope of products it offered (music label, production of reports compiling statistics), with the hope of reducing the cost associated with core-stigma. MindGeek also pursued a de-stigmatization strategy which sought to demonstrate that pornography should be something that’s acceptable to talk about, as well as through a marketing campaign which drew attention to breast cancer.
In our second case study on Sears, Roebuck, and Company, we analyze the dynamics of repugnance. In a dynamic setting, the stigmatization experienced by a firm changes. This can have external reasons such as changed social norms, but in this case the stigmatization increases because the competitors of Sears are strategically pushing for it. Sears was founded in the final quarter of the nineteenth century. Around this period most American towns had one general store which also served as the local post-office. This store had a kind of monopoly over the local market. Therefore, mail-order companies were a disruptive force which challenged the business operations of many general-purpose stores and the supply-chains attached to it. It loosened the strong connection between social life in the town and the commerce being done there. Notably, local churches, bars and general stores were places where racial and social inequalities were enacted and reinforced. Black customers had to wait before all the whites were served and were refused the right to purchase certain goods. The disruption which Sears caused was both economic and social, and hence generated both economic and social opposition.
The challenge that Sears posed to traditional ways of doing business as well as the undesired emancipation of consumption led to large campaigns in opposition to the mail-order company. For instance, Sears faced important difficulties to advertise its products in regional newspapers. Moreover, rumors were spread which build on pre-existing racist prejudices, and smear campaigns alleged that Richard Sears and Alvah Curtis Roebuck were black. Competitors also appealed to the fact that Sears destroyed communities, local business, and jobs. Small shopkeepers, helped by the editors of local newspapers, started to argue for the value of buying local. Those who ordered from mail-order companies were made out to be traitors or sneak thieves of the community. The resulting dynamic in which small shopkeepers teamed up with local organizations and media outlets to stigmatize Sears has clear parallels to the way in which bootleggers during the prohibition era formed a coalition with the ‘Baptists’ to ensure that liquor remained illegal. The Baptists provided the moral case for prohibition, while the bootleggers benefitted from the opportunities in the illegal market in liquor which emerged because of prohibition. Sears had to respond, both in adapting its business strategy, but also by opposing the repugnance by changing the moral discourse around the firm. They argued that their business improved the freedom of choice of consumers, and they presented the catalogue of the firm as the “thrift book of the nation”.
In these two case-studies, different in time and place, we find many similarities. Both firms faced difficulties to advertise their brands, struggled to find business partners, and they both engaged in campaigns in order to associate their brand with more positive values. In an age when moral concerns about diversity, equity, sustainability, animal rights, working conditions are on the rise, and the costs of the mobilization of repugnance are significantly lower due to social media, we are likely to find many firms managing repugnance and stigma. High time, therefore, for economists to take this form of moral opposition to firms seriously.