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Strategy Seminar

Friday, October 31, 2014
12:00 AM
R0420 Ross Business School

Competitive Intensity and Its Two-Sided Effect on Firm Performance

Abstract

This paper contributes to the value-capture stream in strategy, which uses cooperative game theory to analyze value creation and capture by firms under competition. We construct three notions of competitive intensity and analyze their implications for firm performance. These definitions share the motivation that there are two sides to competition – a good side (competition for the firm) and a bad side (competition for its transaction partners). We demonstrate that good competition places a minimum bound on the value captured by the firm, while bad competition imposes a maximum. Our intensity measures all imply intervals that contain the core while demanding less information than it to be computed. Thus, our measures may be interpreted as providing solutions consistent with boundedly rational agents. Simultaneously, they provide both empirically testable implications and normative guidance in settings where a computation of core intervals is not practical.