The role of market failure in the utilisation of quality management services by the tooling industry

Abstract

The primary objective of this research is to identify the determinants of market failure that affect transactions between the tool, die and mould making industry and Quality Management service providers within the Nelson Mandela Bay area. A literature review of market failure, the service economy and the evolution of donors' interventions in business service markets was conducted. It provided valuable insights into the identification of issues that could indicate whether a market was performing optimally, whether the design of the market was functional and how the characteristics of the service allowed it to be traded through market mechanisms. For the empirical study, a questionnaire was developed and administered to 71 tool, die and mould making firms and 15 Quality Management service providers in the Nelson Mandela Bay area in South Africa. The results revealed several areas in the Quality Management service marketplace that are underperforming due to market failures. These are often the result of insufficient information flows which lead to asymmetrical information and adverse selection. There was evidence of market failures caused by the inadequate expression of costs in the prices of Quality Management services, mainly due to the high search and evaluative costs involved in finding a Quality Management service provider or in differentiating between the qualities of the service offerings. It was found that the Quality Management service marketplace was affected by several negative externalities that were often related to insufficient provision of public goods. However, there is a rich institutional landscape supporting the Quality Management marketplace that offsets many of the market failures in the area. The competitiveness of the Quality Management service providers is influenced by several factors, which include the competitive pressure on their customers such as the tool, die and mould making firms, as well as the support and governance provided by supporting institutions. The study concludes with recommendations to the tool, die and mould making firms, Quality Management service providers and the institutions supporting the Quality Management service market place in the Nelson Mandela Bay Metropolitan area.