Economizing and strategizing: How coalitions and transaction costs shape value creation and appropriation

• Author: Kirsten Foss,Christian G. Asmussen,Peter G. Klein,Nicolai J. Foss
• Date: 01 February 2021
• Published date: 01 February 2021
• DOI: http://doi.org/10.1002/smj.3227

RESEARCH ARTICLE

Economizing and strategizing: How coalitions

and transaction costs shape value creation and

appropriation

Christian G. Asmussen

1,2

| Kirsten Foss

3

| Nicolai J. Foss

2,3

|

Peter G. Klein

3,4

1

King's Business School, King's College

London, London, UK

2

Department of Strategy and Innovation,

Copenhagen Business School,

Frederiksberg, Denmark

3

Department of Strategy and

Management, Norwegian School of

Economics, Bergen, Norway

4

Department of Entrepreneurship, Baylor

University, Waco, Texas

Correspondence

Nicolai J. Foss, Department of Strategy

and Management, Copenhagen Business

School, Frederiksberg, Denmark;

Department of Strategy and Innovation,

Norwegian School of Economics, Bergen,

Norway.

Email: njf.si@cbs.dk

Abstract

Research summary: Research has examined how

“economizing”and “strategizing”mechanisms interact in

driving competitive outcomes, but the role of coalitions in

this process has received little attention. Coalitions are

formed to create more value (i.e., economizing) and to

strengthen competitive positions (i.e., strategizing). Based

on a formal coalitional model, we derive several unintuitive

results. We show that economizing actions may backfire

because creating more value may lead other players to

strategize more aggressively, offsetting the additional value

creation. Moreover, creating countervailing power—that is,

building a coalition against players with significant power

such as monopolists—not only allows the coalition to

appropriate more value, but may also benefit the powerful

trading partner by reducing competition among the coali-

tion members. Coalition-formation can hurt coalitions

members by reducing economizing investments.

Managerial summary: Managers typically seek com-

petitive advantage either by improving efficiency

(by having unique resources, lowering costs, or improv-

ing managerial practices) or by trying to obtain stron-

ger bargaining positions against their buyers or

suppliers. We show that these two approaches interact in

surprising ways. For example, efficiency improvements cre-

ate more opportunity for profit, but also give trading

Received: 19 February 2018 Revised: 8 July 2020 Accepted: 29 July 2020 Published on: 15 September 2020

DOI: 10.1002/smj.3227

Strat Mgmt J. 2021;42:413–434. wileyonlinelibrary.com/journal/smj © 2020 John Wiley & Sons Ltd 413

partners stronger incentives to bargain for a share of that

profit. At the same time, small buyers or sellers can band

together into clubs or cooperatives to get better deals from a

powerful trading partner, thereby restraining competition

among themselves. However, large firms can try to prevent

such coalitions from forming by pursuing vertical integra-

tion of potential coalition members. We explore a variety of

bargaining situations and show that the ability to encourage

or thwart coalition formation is an important

managerial tool.

KEYWORDS

bargaining, cooperative games, economizing, strategizing,

transaction costs

1|INTRODUCTION

The strategy literature emphasizes two distinct paths to superior firm performance: a position-

ing approach in which firms make their own markets less competitive by strategizing relative to

rivals, and an efficiency approach that emphasizes a firm's productive assets, relationships, and

managerial practices as the main sources of competitive advantage (e.g., Williamson, 1991,

p. 75; Peteraf & Barney, 2003, p. 320). This distinction is often framed as a contest between

“strategizing”and “economizing”views (Williamson, 1991). Based on industrial economics

(Bain, 1959; Tirole, 1988), strategizing theories highlight market power: Firms achieve supra-

normal profits by creating and sustaining entry barriers, preventing rivals from competing these

profits away (Porter, 1980, 1981). By contrast, economizing theories emphasize efficiency as the

source of competitive advantage (Barney, 1991; Williamson, 1985). The two approaches offer

distinct mechanisms that generate sustained heterogeneity in competitive outcomes (e.g., see

Williamson, 1991, p. 76; Peteraf & Barney, 2003, pp. 320–321).

However, scholars increasingly recognize that the mechanisms underlying these views are

intertwined (Foss & Foss, 2005; Mahoney & Qian, 2013), and several models examine these

links in detail. Thus, Nickerson and van den Berg (1999) investigate assets and organization

choices in a Cournot setting (see also Nickerson, Hamilton, & Wada, 2001). Foss and Foss (2005)

argue that in the presence of transaction costs, economizing and strategizing cannot in general

be separated, as transaction costs make it costly to protect assets and rent streams against other

parties' efforts to strategize (i.e., to capture value associated with those assets or rent streams,

see also Foss, Foss, & Klein, 2018). Makadok (2010) builds a model in which competitive advan-

tage (i.e., economizing) and rivalry restraint (i.e., strategizing) have a negative interaction effect

on profit. Bel (2018) derives results from the resource-based and positioning views as special

cases within an overarching framework based on property rights theory (Hart, 1995). Makadok

and Ross (2018) examine the “adverse competitor replacement”that may happen when a supe-

rior incumbent gets stronger, drives a weaker rival from the market, but thereby invites a stron-

ger rival to enter in its place.

414 ASMUSSEN ET AL.