22 May 2007Working Paper Summaries

The Speed of New Ideas: Trust, Institutions and the Diffusion of New Products

by Felix Oberholzer-Gee and Joel Waldfogel

Does trust confer competitive advantage in terms of time, money, and productivity? Previous research indicates that it does. This study shifts perspective slightly and asks whether trust can also act as a barrier to entry. In other words, are trusted suppliers protected from competition if buyers are reluctant to try new products and services offered by other suppliers? Oberholzer-Gee and Calanog explored the link between levels of trust and the decision to adopt a new product using a field experiment on the diffusion of an innovative floor drain for the plumbing market. Key concepts include:

Entrepreneurs from less-trusted groups—in this study, African-Americans—found it more difficult to overcome trust barriers.
Trust can act as a barrier to entry for new firms and products because trust makes existing relationships more productive.
Trust in current suppliers is a particularly strong deterrent to entry if the product is associated with a less-trusted group.
Information from an intermediary organization, in this case a national industry association, can neutralize the negative impact of trust. Trust in institutions is therefore a valuable substitute for interpersonal trust.

Author Abstract

Trust in buyer-supplier relationships is sometimes regarded as a competitive advantage because trust can increase the gains from trade for firms and their suppliers. In this study, we document a particular type of competitive advantage conferred by trust. Using adoption rates of a new product as a case study, we show that trust protects current suppliers from competitors who offer innovative products. Buyers who trust their current suppliers are less likely to seek information about the new product and they express less interest in purchasing it. Once the product becomes available, they do in fact make fewer purchases. We also find that entrepreneurs from less-trusted groups—in this study, African-Americans—find it particularly difficult to overcome the barriers erected by trust. Trust, we conclude, confers competitive advantage by slowing down the diffusion of new ideas and products in the economy. As trust is built up over time, earning a buyer’s trust confers a significant first-mover advantage.