A property rights theory of competitive advantage

Abstract

Research Summary: This article proposes a formal organizational economics approach to strategic management. Using a Property Rights Theory (PRT) framework, it rationalizes and provides a constructive contribution to two of the main strategy theories: the Resource‐Based View (RBV) and Porter Generic Strategies (PGS). The article shows that the welfare maximizing PRT conditions that characterize the existence and boundaries of a firm parallel both the RBV and Porter conditions for a sustainable competitive advantage, and provides a formal rationalization of Barney’s categorization of resources and Porter’s generic strategies. The article reveals some underexplored aspects of current informal theories, and extends their scope with the integration of strategic networks of complementors and social welfare considerations, opening up new avenues for research. Managerial Summary: This article brings two new insights for managers. First, showing that a firm can garner rents when it is a socially optimal form of organization for the assets it controls, it rationalizes the importance of control and adds a social welfare perspective to strategy. The Resource‐Based View (RBV) and Porter Generic Strategies (PGS), besides theories of competitive advantage, can also be viewed as theories of control. Second, taking into consideration the growing importance of networks and complementors in the knowledge economy, this article highlights the strategic importance of two resource characteristics—collaborative and easy to combine—and opens up new doors for the consideration of two business strategies for managers—platform and coordination—in addition to the traditional cost, differentiation, and focus strategies.