Michael D. Ryall

Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects

Formal contracting addresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment. Alternatively, when firms expect to interact repeatedly, relational mechanisms may achieve similar results without the associated costs. However, as we now know from a growing body of theoretical and empirical work, the resulting intuition---that relational mechanisms will be substituted for formal ones whenever possible---does not generally hold. The extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper. We study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms. Counter to the above intuition (but consistent with recent research), we find that a firms contracts are more detailed and more likely to include penalties when it engages in frequent deals (whether with the same or different partners). Our results suggest complementarity between formal and relational contracts, and have implications for optimal contracting, particularly in high technology sectors.

How Do Value Creation and Competition Determine Whether a Firm Appropriates Value

How does competition among economic actors determine the value that each is able to appropriate? We provide a formal, general framework within which this question can be posed and answered, and then provide several results. Chief among them is a condition that is both required for, and guarantees, value appropriation. We apply our methodology to (i) assess the familiar notion that uniqueness, inimitability, and competition imply value appropriation, and (ii) determine the value appropriation possibilities for an innovator whose unique discovery is of use to several others who can compete for the right to use it.

Brokers and Competitive Advantage

The broker profits by intermediating between two (or more) parties. Using a biform game, we examine whether such a position can confer a competitive advantage, as well as whether any such advantage could persist if actors formed relations strategically. Our analysis reveals that, if one considers exogenous the relations between actors, brokers can enjoy an advantage but only if (1) they do not face substitutes either for the connections they offer or the value they can create, (2) they intermediate more than two parties, and (3) interdependence does not lock them into a particular pattern of exchange. If, on the other hand, one allows actors to form relations on the basis of their expectations of the future value of those relations, then profitable positions of intermediation only arise under strict assumptions of unilateral action. We discuss the implications of our analysis for firm strategy and empirical research.

The Case for Formal Theory

This special topic forum contains seven papers that illustrate many of the ways in which management researchers can use formal tools—mathematical methods, simulation, and formal logic—to develop management research. Here we offer an overview of these methods and their advantages as tools for theory building.

Causal Ambiguity, Complexity, and Capability-Based Advantage

This paper presents the first formal examination of role of causal ambiguity as a barrier to imitation. Here, the aspiring imitator faces a knowledge (i.e., “capabilities-based”) barrier to imitation that is both causal and ambiguous in a precise sense of both words. Imitation conforms to a well-explicated process of learning by observing. I provide a precise distinction between the intrinsic causal ambiguity associated with a particular strategy and the subjective ambiguity perceived by a challenger. I find that intrinsic ambiguity is a necessary but insufficient condition for a sustained capability-based advantage. I also demonstrate that combinatorial complexity, a phenomenon that has attracted the recent attention of strategy theorists, and causal ambiguity are distinct barriers to imitation. The former acts as a barrier to explorative/active learning and the latter as one to absorptive/passive learning. One implication of this is that learning by doing and learning by observing are complementary strategic activities, not substitutes---in most cases, we should expect firm strategies to seek performance enhancement using efforts of both types.

Value Capture Theory: A Strategic Management Review

This paper provides the first review of developments in the application of cooperative game theory to issues of interest to strategic management; what we term “value capture theory.” Value capture theory provides a broad approach to formal strategy theory aimed at under- standing persistent heterogeneity in firm performance, nesting competitive market pressures, resource constraints and internal organizational issues. Our review highlights the primary framework for value capture theory, the blindspots that it resolves that otherwise exists in existing theoretical approaches, the principal insights from the theory as well as a myriad of applications that have been developed in recent years using value capture theory.

Operationalizing Value-Based Business Strategy

Brandenburger and Stuart (1996) identified coalitional games as a means of providing precise notions of value to evaluate strategic opportunities. In this paper, we show how coalitional game theory can be utilized to operationalize these approaches. In particular, we demonstrate the importance of considering full competitive interactions (rather than simply added value) when applying coalitional game theory and also how this can be employed to provide insights into the workings of an existing economic activity as well as to suggest ways that the activity might be altered to a firms advantage. We illustrate with an application in which an innovator considers whether to commercialize a new technology.

Positional Advantage in Networks

Recent research in strategy has called attention to the fact that particular positions in inter-firm networks may serve as a source of competitive advantage for the firms occupying them. This empirical literature has nonetheless found it difficult to separate the effects of positions from those of firm capabilities and resources. We develop a general model for addressing this issue analytically. Our results suggest that agents can enjoy a competitive advantage due only to their positions, but only when several conditions hold, most notably: (i) the agent has relationships to at least three other firms; and (ii) the agent does not hold too strong a position. We also assess the stability of competitive advantages, finding that, while capabilities and resources can confer a stable competitive advantage, positional advantage is not robust to the activities that others might use to diffuse them.

Competitive Intensity and Its Two-Sided Effect on the Boundaries of Firm Performance

The new perspective emerging from strategy’s value-capture stream is that the effects of competition are twofold: competition for an agent bounds its performance from below, while that for its transaction partners bounds from above. Thus, assessing the intensity of competition on either side is essential to understanding firm performance. Yet, the literature provides no formal notion of “competitive intensity” with which to make such assessments. Rather, some authors use added value as their central analytic concept, others the core. Added value is simple but misses the crucial, for-an-agent side of competition. The core is theoretically complete but difficult to interpret and empirically intractable. This paper formalizes three, increasingly general notions of competitive intensity, all of which improve on added value while avoiding the complexity of the core. We analyze markets characterized by disjoint networks of agents (e.g., supply chains), providing several insights into competition and new tools f...

Empirical Implications of Information Structure in Finite Extensive Form Games

We analyze what can be inferred about a games information structure solely from the probability distributions on action profiles generated during play; i.e., without reference to special behavioral assumptions or equilibrium concepts. Our analysis focuses on deriving payoff-independent conditions that must be met for one game form to be empirically distinguished from another. We define empirical equivalence and independence equivalence. The first describes when two game forms can never be distinguished based solely on the empirical distribution of player actions. As this turns out to be difficult to characterize, we introduce the latter, which describes two game forms that imply the same minimal sets of conditional independencies in every one of their empirical distributions. Our main contribution is to identify, for an arbitrary game form, the minimal set of conditional independencies that must arise in every one of its empirical distributions. We also introduce a new graphical device, the influence opportunity diagram of a game form which facilitates verifying independence equivalence, and hence provides a simple necessary condition for empirical equivalence.