Competitor Orientation and The Evolution of Business Markets

When people envisage competitive markets they usually assume that only those who are aiming to maximize profits will survive. This evolutionary argument is an interesting one, see here. The main problem I’d identify is that this presumes that all markets are the same. Different ecosystems see different animals thriving and so it would be surprising to me if exactly the same behaviour thrived in every market.

Mark Vandenbosch, an Ivey colleague, and I considered business markets. In such markets reputations typically matter. This makes a huge difference from the anonymous markets that dominate financial market theory. When reputations matter stategic considerations become more interesting. If I can develop a reputation for aggressiveness now I might gain in future interactions as partners make concessions rather than face a potentially destructive battle.

We considered two main types of market based upon classic game theory scenarios. Chicken represents battles over scarce resources. For instance, two firms considering a market entry where if only one enters that firm will be very profitable but if both enter the competition will doom both to a loss. The Battle of Sexes represents scenarios where managers are negotiating over the surplus created by a deal. This describes channel partnerships where all want to work together but each manager wants the other manager to agree to terms favourable to them.

In both of these markets we examined whether competitor orientation could survive. Competitor orientation is the desire for relative, not absolute, success. Competitor-oriented managers can prefer less profit over more profit as long as another manager gets less profit. Given selection in the markets we studied was based solely upon profits one might think that those who survived would be those who aimed to maximize profits. This was not the case. The competitor-oriented could perform well by scaring their more profit focused rivals. They could credibly commit to aggressive action and so often collected big prizes abandoned by profit maximizers who wouldn’t risk fighting for them. Big problems arose when the population consisted of too many of the competitor-oriented. They hurt each in fights caused by their excess aggressiveness causing the population to stabilize before the competitor-oriented took over the population.

Our conclusion: “Selection on profitability will often not weed out the competitor-oriented”. (Bendle and Vandenbosch 2014, page 793). The evolution of markets is more interesting than intuition based upon profit maximization might suggest.

Read: Neil Bendle and Mark Vandenbosch (2014), Competitor Orientation and the Evolution of Business Markets, Marketing Science, 33 (6) November-December, page 781-795