Peter B. Zemsky

Collusion in second price auctions with heterogeneous bidders

Abstract We show that efficient collusion by any subset of bidders in second price private value auctions is possible, even when the bidders are heterogeneous. An important property of efficient collusion is that a bidders net payoff from participating in collusion is independent of her valuation. We show that the cooperative game whose characteristic function (evaluated at a coalition) is the ex ante collusive surplus (of that coalition) has a nonempty core. A feature of more technical interest is the mechanism characterization when the private information of agents does not enter in a linear (or even piecewise linear) manner.

The Timing of Resource Development and Sustainable Competitive Advantage

We develop a formal model of the timing of resource development by competing firms. Our aim is to deepen and extend resource-level theorizing about sustainable competitive advantage. Our analysis formalizes the notion of barriers to imitation, particularly those based on time compression diseconomies where the faster a firm develops a resource, the greater the cost. Time compression diseconomies are derived from a micromodel of resource development with diminishing returns to effort. We use a continuous time model of the flows of development costs and market revenues, which allows us to integrate strategic and financial analyses of firm investment problems. We examine two dimensions of sustainability: whether the resources underlying a firms competitive advantage are economically imitable and, if so, how long imitation takes. Surprisingly, we show that sustainable competitive advantage does not necessarily lead to superior performance. We find that imitators sometimes benefit from reductions in their absorptive capacity and that innovators should license either all or none of their knowledge. Despite recent criticisms, we reaffirm the usefulness of a resource level of analysis for strategy research, especially when the focus is on resources developed through internal projects with identifiable stopping times.

The Horizontal Scope of the Firm: Organizational Tradeoffs vs. Buyer-Supplier Relationships

Horizontal scope---the set of products and services offered---is an important dimension of firm strategy and a potentially significant source of competitive advantage. On one hand, the ability to build close buyer-supplier relationships over multiple transactions can give an advantage to broad firms that offer buyers “one-stop shopping.” On the other hand, the existence of organizational tradeoffs can give an advantage to firms that specialize in a narrower range of products or services. We develop a biform game that incorporates this tension and show how the use of three generic scope strategies---specialist, generalist, and hybrid---depends on organizational tradeoffs, client-specific scope economies, barriers to entry, heterogeneity in buyer task requirements, and the bargaining power of suppliers relative to buyers. We then use the model to study a variety of issues in supply chain management, including the gains to coordinating suppliers, the optimal level of buyer power, and the desirability of subsidizing suppliers. One of our objectives is to show how biform games, which introduce unstructured negotiations into game theory analysis, can be used to develop applied theory relevant to strategy. Generalizing from our stylized model, we identify a class of biform games involving buyers and suppliers that is useful for strategy analysis. Games in this class have the attractive property of each suppliers share of industry total surplus being the product of its added value and its relative bargaining power.

MONEY TALKS: DETERRING QUALITY CHALLENGERS IN CONGRESSIONAL ELECTIONS

J /4T/e examine the role of incumbent fundraising in deterring strong challengers. We construct Vf V a signaling model in which incumbents can use fundraising strategically to ward off W v quality challengers. We show, however, that only under very limited circumstances will there be an observable relationship between fundraising and challenger quality. Therefore, previous empirical tests for deterrence have systematically underestimated the effects of fundraising in decreasing electoral competition. Our analysis also suggests that by making fundraising easily observable, Federal Election Commission regulations may encourage candidates to overinvest time and resources accumulating large war chests instead of governing.

Positioning on a Multiattribute Landscape

Competitive positioning is a central, yet understudied, topic in strategy. Understanding positioning requires understanding two distinct mappings: how underlying policies are transformed into positions, and how positions are transformed into market performance. A complete treatment of positioning requires incorporating organizational design in the presence of policy interdependence; consumer choice in the presence of trade-offs among multiple product attributes; and competitive interactions among firms. We develop a model that integrates these elements. We show that in a multiattribute setting, trade-offs have critical, nonmonotonic effects on a range of strategy questions including the relationship between positions that are operationally efficient and those that remain viable in the face of competition as well as the concentration of market share in the industry. Of particular interest are implications for firm heterogeneity. We show that increases in business policy interdependence can decrease positioning heterogeneity among firms in an industry, depending on the nature of trade-offs. We also show that the relationship between strategy heterogeneity and positioning heterogeneity is moderated by the extent of policy interdependence. This paper was accepted by Bruno Cassiman, business strategy.

Adoption is Not Development: First Mover Advantages in the Diffusion of New Technology

The diffusion of new technology among competing firms is of long-standing interest in industrial organization. There is an extensive theoretical literature on technology adoption in which firms can instantaneously deploy a new technology in the market at a cost that is exogenously falling over time. While such models explain diffusion (firms adopt asynchronously), Fudenberg and Tirole (1985) show that the incentives to preemptively adopt in sub-game perfect equilibria can cause rents to be equalized across firms. In contrast, we study technology development where costly and time consuming effort is required to deploy a new technology. With diminishing returns to instantaneous effort, delaying deployment reduces the firms cost, as in adoption models. However, the incentive to preempt is lower: with its development already partially complete, a preempted firm delays deployment less than with adoption. We provide reasonable conditions under which the sub-game perfect equilibrium outcome corresponds that in the pre-commitment equilibrium first proposed by Reinganum (1981a, 1981b), yielding both diffusion and first mover advantages for the case of technology development.

A Demand Based View of Sustainable Competitive Advantage

We develop an approach to analyzing the sustainability of competitive advantage that emphasizes demand-side factors. We extend the added-value approach to business strategy by introducing an explicit treatment of how firms create value for consumers. This allows us to characterize how consumer heterogeneity and marginal utility from performance improvements on the demand-side, interact with resource heterogeneity and improving technologies on the supply-side. Using this approach, we address a variety of questions including whether technology substitutions will be permanent or transitory; the sequence in which new technologies attack different market segments; how rents from different types of resources change over time; whether decreasing marginal utility and imitation give rise to similar rent profiles; the extent of synergies within a firms resource portfolio; the emergence of new generic strategies; and the conditions that support strategic diversity in a market. Our focus on consumer utility and value creation complements the traditional focus in the strategy literature on competition and value capture.

Value-Based Strategy with Frictions

We extend the formal literature on the value-based foundations of strategy, an approach which seeks to integrate industry-level and firm-level analyses of superior performance. The value-based approach starts with the set of players in an industry value chain and their value creation possibilities based on heterogeneous resources and capabilities and it then links these elements to the performance (value capture) of individual firms. While the received theory assumes frictionless interactions and perfect rivalry, there is a long tradition in strategy that explores the effect of imperfect competition on firm performance. To incorporate imperfect competition, we add a simple friction parameter into value-based analysis that moderates the degree of rivalry in the market, as well as adding a parameter for barriers to entry. We then analyze a variety of classic issues in competitive strategy. We show that the effects of rivalry and barriers to entry on industry attractiveness cannot be analyzed independently. Firm heterogeneity emerges naturally in our setting and depends on the degree of frictions. We find that firms with a competitive advantage prefer industries with lower levels of frictions than their disadvantaged rivals. Overall, we show that introducing frictions makes value-based strategy even more effective at providing an integrated approach to industry-level and firm-level analyses.