Organizations and Markets

Product and Factor Markets in the RBV

17 February 2010 at 6:04 am Nicolai Foss 1 comment

| Nicolai Foss |

It is often argued that  firm strategy is fundamentally rooted in various imperfections. Strategic management has long been characterized by an intellectual division of labor in which the resource-based view handled (strategic) factor market imperfections and various positioning approaches took care of product market imperfections. This dichotomy is beginning to break down. Two recent papers, one a theory of science-based piece, the other a theory piece, discuss the product/factor market dichotomy and show why it is problematic.

In “Theoretical Isolation and the Resource-based View: Symmetry Requirements and the Separation Between Product and Factor Markets,” Niklas Hallberg and yours truly argue that the RBV treats factor markets as imperfect and product markets as perfect (an approach that we argue is adopted from mainstream economics and its tendency to work with on-off assumptions). We argue that this asymmetry is problematic, as there is a general case to be made for symmetrical assumptions and as it borders on logical inconsistency to assume — within the same model — that one set of markets is perfect and another set is imperfect. The paper isn’t online, but you can email me at njf.smg@cbs.dk for a copy. (Abstract below).

In “Chicken, Stag, or Rabbit? Strategic Factor Markets and the Moderating Role of Downstream Competition,” my CBS (Center for Strategic Management and Globalization) colleague, Dr. Christian Geisler Asmussen, models various deviations from perfect(ly competitive) product markets and shows how these impacts firms’ factor market behaviors and whether they can derive rents from resources purchased on these markets. I believe this is the first systematic study of its kind in the literature (and there are some seriously counter-intuitive findings in it). Very highly recommended!

Foss & Hallberg
Theorizing simplifies reality by means of “isolation” whereby some phenomena or aspects thereof are excluded from consideration by means of assumptions. Using the case of the resource-based view, we discuss types of isolation in theorizing. We specifically develop the case for symmetry in theoretical isolations, show that the RBV violates a symmetry requirement, and argue that a more symmetrical RBV will lead to novel insights.

Christian Geisler Asmussen
Scholars of the resource-based view have developed rich theories of strategic factor markets and pointed to the important implications that the existence of such markets has for firm performance. The prevailing approach in these studies has been to look at the structure of the strategic factor markets themselves, highlighting asymmetries in information or resource complementarity as sources of strategic factor market rents. In contrast, the structure of the downstream markets of the resource-acquiring firms has not been tied explicitly to their participation in upstream (strategic factor) markets. This paper fills that research gap by developing a game-theoretic model of how firms interact in both upstream and downstream markets. It shows that resource-acquiring firms with downstream monopoly power may earn rents on a strategic factor market, as soon as the price of the resource is below its value. However, if firms face strong competition in their output markets they will earn average rents of zero even though the equilibrium price of the resource will generally always be below its economic value. Finally, and most surprisingly, a firm may lose rents from its access to a strategic factor market if it operates in a downstream oligopoly market where tacit collusion is the normal state of affairs.

Entry filed under: - Foss -, Papers, Recommended Reading, Strategic Management.