Illegitimacy Discount, Sensitivity to Trivial Difference and Distance-keeping Competition

This study examines whether the positive association between the radicalness of innovation and the creation of competitive advantage will always hold true. From the perspective of institutional theory, this study suggests the following: (1) the selection environment of producers does not always favor radical innovation; (2) as is the case with the ecological model of legitimation (Hannan and Freeman, 1984; Polos, Hannan and Carroll, 2002), the legitimacy of a product category creates demand for a product that belongs to that category; and (3) as is the case with the model of illegitimacy discount as well as Harrison White’s model of the market (White, 2002; Zuckerman, 1999), consumers are sensitive to trivial quality difference among producers that belong to a reliable product category, yet insensitive to quality difference outside a acceptable and thus legitimate zone of quality. From a two-staged model of R&D race with illegitimacy discount, it shows that innovators with radical innovations may pay the price of illegitimacy discount, facing little demand from the market; that the institutional pressure arising from consumers renders managers to compete for trivial quality difference, not radical one, keeping their products to have comparable qualities yet in a differentiable fashion; and that rivalry in product markets is more likely to place products in the legitimate zone of quality difference, namely, distance-keeping, not distance-destroying, as is assumed in radical innovation.