Chicken, Stag, or Rabbit? Strategic Factor Markets and the Moderating Role of Downstream Competition

Abstract

Scholars of the resource-based view have developed rich theories of strategic factor markets and pointed to the important implications that the existence of such markets has for firm performance. The prevailing approach in these studies has been to look at the structure of the strategic factor markets themselves, highlighting asymmetries in information or resource complementarity as sources of strategic factor market rents. In contrast, the structure of the downstream markets of the resource-acquiring firms has not been tied explicitly to their participation in upstream (strategic factor) markets. This paper fills that research gap by developing a game-theoretic model of how firms interact in both upstream and downstream markets. It shows that resource-acquiring firms with downstream monopoly power may earn rents on a strategic factor market, as soon as the price of the resource is below its value. However, if firms face strong competition in their output markets they will earn average rents of zero even though the equilibrium price of the resource will generally always be below its economic value. Finally, and most surprisingly, a firm may lose rents from its access to a strategic factor market if it operates in a downstream oligopoly market where tacit collusion is the normal state of affairs.