Postrel on Competitive Advantage

21 August 2009 at 9:01 am 3 comments

| Peter Klein |

Former guest blogger Steve Postrel gave an interesting presentation at last week’s AoM Professional Development Workshop on competitive advantage: “Competitive Advantage: Can’t Live With It, Can’t Live Without It.” Steve sent me the slides and was happy to share them here. Add your questions and comments below.

Steve provides a set of conditions that must be met for competitive advantage to be internally consistent and operationally meaningful, then presents his own (unique) definition, a simple and precise formulation in terms of gains from trade:

Seller 1 has competitive advantage over Seller 2 with respect to a specific transaction if and only if the economic surplus (gains from trade = V – C) from a transaction between 1 and the buyer is greater than the surplus from a transaction between 2 and the buyer. The difference in surplus is the CA.

A series of implications, qualifications, and applications follows. What do you think?

Entry filed under: - Klein -, Former Guest Bloggers, Management Theory, Strategic Management. Tags: .

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3 Comments Add your own

  • 1. Michael F. Martin  |  21 August 2009 at 12:00 pm

    I like the definition very much. I’m glad it stays agnostic as to how the surplus is split up, which is a different matter.

    I especially like the slide on timing and choices. The way that CA evolves over time is a big part of what has helped it elude a more precise definition.

  • 2. Ty Mackey  |  21 August 2009 at 2:31 pm

    “Firms can still screw up the price game even with CA if they under or overestimate their relative surplus”

    My question is, if firms are heterogeneous with respect to their pricing capabilities, and we can think of pricing capabilities as something that can be bought in imperfect factor markets (hiring econ/marketing types who can do market research to find the optimal price), then is it the case that superior expectations about pricing capabilities are not a source of CA, but do lead to superior returns?

    Really interesting stuff.

  • 3. srp  |  22 August 2009 at 1:55 pm

    Ty:

    The way I have it defined, being good at pricing is not part of V-C and so is not part of having or not having a CA. It’s a deliberate separation of the issues. So somebody who is good at pricing but is at a competitive disadvantage might be able to out-earn a direct rival with CA. This is pretty common in zero-sum contests–sometimes you can win in poker with a worse hand or in chess when you’re down material or in track when your times are slower. But that’s not the way to bet.

    As an aside, I’d like to note the problem of explaining decision-making in terms of capabilities. If the normative theory under consideration is about how best to make a certain type of decision, then self-reference problems ensue when you talk about pre-existing “capabilities” at making that decision. If such capabilities were available, it’s not clear why you would need the normative theory in the first place.

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