Do New Competitors, New Customers, New Suppliers, ... Sustain, Destroy or Create Competitive Advantage?

Michael D. Ryall, Melbourne Business School
Glenn MacDonald, Washington University

Abstract

A new player, e.g., an entrant, joining an existing game generally allows more value to be created, but also creates new alternatives for existing players. Greater value expands the range of equilibrium appropriation levels for an existing player, in particular, lowering the minimum equilibrium appropriation. The emergence of new alternatives has the opposite effect.

We say a player has "competitive advantage" if the player's minimum equilibrium appropriation is strictly greater than the player's outside alternative. That is, the forces of competition alone, as embodied in the conditions defining equilibrium, suffice to guarantee a player appropriates more than the best alternative to being in the game, i.e., a sustainable performance advantage.

When a player has competitive advantage pre-entry, but not post-entry, we say entry "destroys" competitive advantage; likewise for "creating" and "sustaining" competitive advantage. Our results provide complete characterizations (i.e., if and only if statements) of the features of a game that cause the addition of a new player to destroy, create or sustain competitive advantage in a general coalitional game.

These results are of importance for strategy issues since -- as argued by proponents of value-based business strategy, e.g., Brandenburger and Stuart (1996) -- many of the economic interactions of interest in strategy are well-described as coalitional games.