Sum of the Parts? An Empirical Test of Efficiency Advantage and Rivalry Restraint

Abstract

Resource based theory and industrial organization economics are key conceptual and empirical anchors used to examine firm performance. Some of their key insights are that competitive advantage (i.e. cost efficiencies) and rivalry restraint (i.e. horizontal differentiation) are associated with higher firm performance, yet these two mechanisms have mostly been examined independently of one another. One common theme emerging from a nascent body of analytic studies is that the interaction of competitive advantage and rivalry is important and not simple. Most of what we know stems from key model predictions and still requires empirical validation. To this end, this study empirically tests key analytic model conclusions using market-level data over nineteen years of twenty U.S. carriers competing in the domestic U.S. airline industry. Using two measures of firm performance, our validation study finds strong support for the complex and nuanced interaction of cost efficiency advantage and horizontal differentiation on firm performance detailed in prior analytic work.