Strategic Behavior Of Firms Research Articles

Market Power in Output and Emissions Trading

This article focuses on the strategic behavior of firms in the output and the emissions markets in the presence of market power. We consider the existence of a dominant firm in the permit market and different structures in the output market, including Cournot and two versions of the Stackelberg model, depending on whether the permit dominant firm is a leader or a follower in the output market. In all three models, the firm that dominates the permit market is more sensitive to its initial allocation than its competitor in terms of abatement and less sensitive in terms of output. In all three models, output is decreasing and the permit price is increasing in the permit dominant firm’s initial allocation. In the Cournot model, permit dominance is fruitless in terms of output and profit if the initial allocation is symmetric. Output leadership is more relevant than permit dominance since an output leader always tends to, ceteris paribus, produce more and make more profit whether it also dominates the permit market or not. This leadership can only be overcompensated for by distributing a larger share of permits to the output follower, and only if the total number of permits is large enough. In terms of welfare, Stackelberg is always superior to Cournot. If the initial permit allocation is symmetric, welfare is higher when the same firm dominates the output and the permit market at the same time.

Exploitation of a Productive Asset in the Presence of Strategic Behavior and Pollution Externalities

We study the strategic behavior of firms competing in the exploitation of a common-access productive asset, in the presence of pollution externalities. We consider a differential game with two state variables (asset stock and pollution stock), and by using a piecewise-linear approximation of the nonlinear asset growth function, we provide a tractable characterization of the symmetric feedback–Nash equilibrium with asymptotically stable steady state(s). The results show that the firm’s strategy takes three forms depending on the pair of state variables and that different options for the model parameters lead to contrasting outcomes in both the short- and long-run equilibria.

The Superstitious Heuristic: Conceptualization and Measurement

The use of superstition as a heuristic in strategic decision-making is a phenomenon that commonly exists in different cultures and influences firms’ strategic behaviors and performance. In spite of its prevalence and importance, the phenomenon has been largely neglected in the strategy literature. As a first step toward filling this research gap, this study introduces the construct of superstitious heuristic and develops its conceptualization and measurement. Synthesizing literature on superstition and heuristics, I explore the definition and dimensionality of the superstitious heuristic, map it into the existing literature, and differentiate it with other traditional heuristics. I develop a Superstitious Heuristic Scale (SHS) that is applicable in different cultures and decision settings and validate it in the strategic decision context. In doing so, this study advances heuristics research in strategic management and offers a new angle to explain firm strategic behavior and performance. In a broader sense, it contributes to behavioral strategy research in response to the call for more endeavors that build the psychological underpinning of strategic management.

Time-of-use pricing of electricity in monopoly and oligopoly

This paper discusses the efficiency gains for time-of-use pricing over flat-rate pricing in the electricity sector. The electricity market may be characterised by a monopoly in some cases, where a single firm continues to enjoy market power, or an oligopoly, where two or more firms compete against one another by strategic interaction. This study establishes the feasibility condition for efficiency gains to arise from time-of-use pricing in a monopolistic set up using constrained optimization. In an oligopolistic set-up, the strategic interaction between producers depends on the level of demand. In case of high demand, the producers compete on the basis of output they will produce, resulting in a Cournot-type competition. On the other hand, in case of low demand, an oligopolistic structure may break with only the most efficient firm operating, or results in the emergence of leader firms and follower firms, i.e. the Stackleberg model of oligopoly. The strategic behaviour of firms in a duopoly, generalizable to n firms, is modelled in this study using constrained optimization.

Being different matters! A closer look into product differentiation in specialty coffee family farms in Central America

PurposeThere is a growing interest in understanding the strategic behaviour of family firms producing international commodities such as coffee, particularly in contexts where decisions about what products to sell, where to commercialise them and how to promote them appear to be highly based on both business and family aspects. The purpose of this paper is to explore product differentiation strategies in family firms in the specialty coffee industry across Latin American countries. Whilst the socioeconomic relevance of coffee production in Central America is unequivocal, the approach and rationale of families that engage in specialty coffee production remain underexplored.Design/methodology/approachThis study examines product differentiation in specialty coffee family farms across countries in Central America: Guatemala, Honduras and Nicaragua. The study relies on in-depth interviews, case studies and an interpretative approach to unpick the dynamics of product differentiation by families in business dedicated to producing specialty coffee.FindingsThe findings show that product differentiation in specialty coffee family farms is influenced by both business and family aspects and driven by entrepreneurial stewards. Coffee-farming families can engage in product differentiation through a shared vision, a combination of traditional and specialised knowledge, and through the continuous development of an exchange network. The findings reveal a connection between families in business balancing family and business interests, and the strategic intention to build up their assets entrepreneurially over time.Originality/valueThis study contributes to the literature on stewardship and strategic behaviour in family firms when families in business engage in differentiating their products in a highly competitive industry. More specifically, this study focuses on companies across countries where coffee is of crucial socioeconomic importance, and where the said companies are owned and managed by families. The study expands understanding of product differentiation in family-enterprise-first businesses and suggests that the family elements in differentiation can be explained through an entrepreneurial stewardship perspective.

Emissions permit allocation and strategic firm behavior: Evidence from the oil sector in the European Union emissions trading scheme

AbstractWith the growing urgency of climate change, governments around the world are increasingly implementing new regulations for greenhouse gases. This trend elevates the importance of examining how firms engage in strategic efforts to influence regulations before they are in place and how they respond once they are in effect (i.e., their ex‐ante and ex‐post strategic behavior). This paper examines the outcomes of such strategic efforts by multinational and domestic oil companies within the European Union emissions trading scheme. An analysis of a panel dataset of oil firms (2008–2012) shows that on average the outcome of ex‐ante strategies did not differ significantly between multinational companies (MNCs) and domestic firms. However, the findings indicate that among those firms that received positive net benefits from the new climate policy, domestic firms were able to maximize these benefits better than MNCs through their ex‐post strategies. In contrast, among the firms that faced net costs due to the policy, MNCs were able to minimize these costs better than domestic firms, ex‐post. This paper advances our understanding of whether and to what extent MNCs differ from domestic firms in their economic outcomes stemming from strategic behavior related to emissions trading. This question is especially pertinent for regulations related to climate change, which is one of humanity's grand challenges and has important consequences for our economic, social, and political systems.

Social Conflict in Rural Regions and Firm Ownership: Evidence from the Mining Sector in Latin America

Using firm-level data for five countries in Latin America we find a negative and statistically significant link between social conflict in rural areas and ownership of mines. This result suggests that the social conflict around mining projects can affect strategic firm behavior intended to diversify risk in the face of social, political and financial pressures. It constitutes evidence that the costs of social conflict can be considered a serious challenge for firms and diverges from the literature which has generally viewed these costs as relatively unimportant to investment decisions. We apply broad sensitivity tests and find that this is robust. Our results also hold to a formal test of changes in specification.

Social Conflict in Rural Regions and Firm Ownership: Evidence from the Mining Sector in Latin America

Using firm-level data for five countries in Latin America we find a negative and statistically significant link between social conflict in rural areas and ownership of mines. This result suggests that the social conflict around mining projects can affect strategic firm behavior intended to diversify risk in the face of social, political and financial pressures. It constitutes evidence that the costs of social conflict can be considered a serious challenge for firms and diverges from the literature which has generally viewed these costs as relatively unimportant to investment decisions. We apply broad sensitivity tests and find that this is robust. Our results also hold to a formal test of changes in specification.

Institutional explanations for local diversification: a historical analysis of the Japanese beer industry, 1952-2017

ABSTRACT Institutional isomorphism suggests that three forces (normative, coercive and mimetic) create strategic inertia within an institutional field and offers a perspective on firms’ behavior when they are confronted with similar challenges. However, we know little about how these forces work over an extensive longitudinal period. This manuscript examines the extent to which factors that drive isomorphism shift over time and identifies the consequent implications for the strategic behavior of firms. Our historical case study of the Japanese beer industry, spanning 60 years, demonstrates how domestic pressures led to homogeneity and convergence in a closed setting from the 1950s to the 1980s, while new industry pressures prompted by globalization resulted in strategic change favouring product differentiation and diversification between 1990 and 2017. Implications for theory and practice are discussed.

Business group affiliation and foreign subsidiary performance

AbstractResearch SummaryBusiness group (BG) affiliation affects the strategic behavior and performance of firms. Until now it has been theoretically unclear and insufficiently empirically tested whether affiliation advantages extend to the foreign subsidiaries of group members. We attempt to determine if they do, and if so, to identify the boundary conditions that matter. We analyze a large panel of 451 foreign subsidiaries of 136 Indian multinational firms over the 2003–2012 period and find that BG affiliation does enhance foreign subsidiary performance when host‐market institutions are weak and when the parent is in manufacturing.Managerial SummaryOur research speaks directly to managers of multinational firms who seek to leverage the benefits of BG affiliation across national borders. We show that BG affiliation is only beneficial when the foreign subsidiary is located in a country characterized by weak institutions and when the parent is in manufacturing. If, on the other hand, the foreign subsidiary is in a country with well‐functioning institutions and the parent in services, managers will not be able to count on BG advantages, rather they will have to develop competitive capabilities locally, that is, the foreign subsidiary will have to function more like a standalone firm.

Firms’ Beliefs and Learning: Models, Identification, and Empirical Evidence

This paper reviews recent literature on structural models of oligopoly competition where firms have biased beliefs about the primitives of the model—e.g. demand, costs—or about the strategic behavior of other firms in the market. We describe different structural models that have been proposed to study this phenomenon and examine the approaches that have been used to identify firms’ beliefs. We discuss empirical results in recent studies and show that accounting for firms’ biased beliefs and learning can have important implications on our measures and interpretation of market efficiency.

Will Artificial Intelligence Change Strategic Top Management Competencies?

<p>The probability is high that Artificial Intelligence (AI) will provide the answer to future product and market innovations. It has the ability to induce a fundamental change in products, markets, models, and paradigms. Manufacturing and a wide spectrum of services are undergoing a near-revolutionary change driven by AI delivered innovations. Computing equipment capable of what one may term partial and quasi-intelligent behavior is the trigger. Ways and means of converting this new phenomenon into the strategic behavior of firms is a murky process today. Yet this process will create new premises for strategic thinking and, in the process, new demands on executive competencies.</p>

Firm strategic behavior and the measurement of knowledge flows with patent citations

Research SummaryThis research addresses firms' use of external knowledge sources to develop patented inventions and explores the validity of patent citations as an indicator of interfirm knowledge flows. By comparing patent citations with primary data reported by the inventors, we uncover systematic measurement errors in patent citations and show that they depend on the firms' patent strategies (e.g., to reduce the risk of imitation or litigation), the source of knowledge employed (e.g., competitors, users), the technology of the underlying invention, and the institutional characteristics of the patent system. Our findings about the role of these factors in external knowledge sourcing and citing propensity highlight the importance of firms' strategic behavior and offer novel insights for the use of patent citations as an indicator of knowledge flows. Managerial SummaryFirms' open innovation strategies rely on the sourcing of knowledge from other organizations. Tracing these knowledge flows is difficult, such that the empirical research on this matter typically uses citations that patents make to prior art in order to track them. However, patent citations might be added also for reasons other than the actual transfer of knowledge. We use primary information from a large survey of inventors to assess the accuracy of patent citations to measure knowledge flows, and we find evidence of measurement errors that depend on the applicants' patent strategies, the type of knowledge sources used, the filing jurisdiction, and the technology of the underlying invention. We offer insights to evaluate the settings in which patent citations are a reliable measure of knowledge flows.

When Efficient Firms Flock Together: Merger Incentives Under Yardstick Competition

Local monopolists that are regulated by yardstick competition frequently merge with their peers. However, economic theory provides little guidance for merger analysis. In contrast, the theoretical model in this article shows that there can be room for strategic firm behaviour even in a setting where firms are many and collusion is not sustainable. Specifically, the article derives conditions under which firms propose welfare-decreasing mergers to avoid competition with efficient peers and establishes when peer effects discourage firms from implementing socially desirable mergers. Efficient peers flock together whereas inefficient firms remain independent, unless peer effects are counteracted by efficiency effects.

Does acquisition of mineral resources by firms in resource-importing countries reduce resource prices?

This study theoretically and empirically examines how resource prices are affected when firms in resource-importing countries acquire mineral resources. The study's theoretical examination considers a simple, two-period model that demonstrates how firms acquiring mineral resources may raise either present or future resource prices. This finding implies that resource consumption in either period may decline. Strategic behavior of resource-mining firms, demand for final goods, and extraction costs play key roles in this examination. Using a dynamic panel model with oil price data, the study's empirical portion estimates how acquiring resources affects the price of oil. Results demonstrate that prices in the present period rise, and prices in future periods decline.

A dynamic multi-stage slacks-based measure data envelopment analysis model with knowledge accumulation and technological evolution

Dynamic data envelopment analysis (DEA) models are built on the idea that single period optimization is not fully appropriate to evaluate the performance of decision making units (DMUs) through time. As a result, these models provide a suitable framework to incorporate the different cumulative processes determining the evolution and strategic behavior of firms in the economics and business literatures. In the current paper, we incorporate two distinct complementary types of sequentially cumulative processes within a dynamic slacks-based measure DEA model. In particular, human capital and knowledge, constituting fundamental intangible inputs, exhibit a cumulative effect that goes beyond the corresponding factor endowment per period. At the same time, carry-over activities between consecutive periods will be used to define the pervasive effect that technology and infrastructures have on the productive capacity and efficiency of DMUs. The resulting dynamic DEA model accounts for the evolution of the knowledge accumulation and technological development processes of DMUs when evaluating both their overall and per period efficiency. Several numerical examples and a case study are included to demonstrate the applicability and efficacy of the proposed method.

An evolutionary theory of demand-side determinants of strategy dynamics

Purpose This paper aims to explain how the dynamic demand environment influences strategic firm behavior along an industry’s evolutionary path. A conceptual gap concerning the influence of demand-side environmental factors (vis-à-vis changes in technology and policy) on firms’ strategic choices motivates the theory developed herein. The paper’s contribution to the literature on “evolutionary perspective in strategy” also addresses an important gap in the emerging literature on “strategy dynamics”. Design/methodology/approach The conceptual framework in this paper features a dynamic demand environment that provides the structural context for firms’ strategic choices. It conceptualizes demand-side competence as a mediating firm-specific construct to explain the endogenous relationship between the characteristics of the demand environment and firms’ path dependent demand-side investments. Findings A review of the literature on evolutionary perspective in strategy reveals an important conceptual gap concerning the structural determinants of dynamic firm behavior. There is no explanation of the endogenous relationship between dynamic demand structure, firms’ dynamic demand-side competence, and temporally heterogeneous strategic choices. Originality/value The demand-side explanation of how idiosyncratic firm behavior is endogenously determined, with both structural characteristics (demand structure) and firm competences (demand-side competence), addresses an important conceptual gap. The novelty of the theory developed herein lies in its explication of the effect of dynamic demand environment on the evolution of idiosyncratic strategic firm behavior – entry, investment and exit – along the evolutionary path of an industry. The theory developed herein not only explains the effect of both determinants of idiosyncratic strategic firm behavior – the external industry environment (dynamic market structure) and internal firm environment (dynamic firm competences) – but also explains how the determinants evolve along the industry’s lifecycle.

Asymmetric equilibria in spatial competition under weakly concave scoring rules

The Hotelling–Downs model of spatial competition is used to investigate the strategic position-taking behavior of firms or political parties under scoring rules. Previous studies of non-convergent Nash equilibria – equilibria in which divergent positions are chosen – found that they often do not exist and, when they do, they are fairly symmetric. In particular, this is true for convex scoring rules (Cahan and Slinko, 2017). Here, we investigate non-convergent equilibria for the broad class of weakly concave scoring rules. Surprisingly, we find that only asymmetric equilibria can exist, and we present several examples.

Strategic Timing of 8-K Filings by Privately Owned Firms

SYNOPSISManagers have discretion over the day of the week and the time of day that 8-Ks are filed with the Securities and Exchange Commission (SEC), so they can elect to file an 8-K containing negative news at times with lower market attention. Several recent studies find various stock price-related incentives for strategic filing behavior for firms with publicly traded equity. In this study, we use 8-K filings from firms with public filings (mostly from public debt) but non-public equity ownership from 2004–2014 to explore the strategic timing behavior of firms without stock price motivations. Consistent with strategic disclosure, we find evidence that bad news 8-Ks are more likely to be filed when market attention is lower (just after markets close, on Fridays, and after markets close on Fridays) even absent stock price concerns. Cross-sectionally, we find more strategic timing for firms with external scrutiny from analysts and credit rating agencies, despite the sophistication of those market participants. Within firms, we also find more strategic timing around public debt offerings, a time of increased market scrutiny for private firms. Lastly, we use EDGAR download data to provide supporting evidence that strategic timing of bad news disclosures does reduce short-window stakeholder attention to the bad news. Overall, we provide evidence that privately owned firms behave strategically within the 8-K reporting rules despite the lack of stock price incentives.

Towards a Holistic Regulatory Approach for the European Data Economy: Why the Illusive Notion of Non-Personal Data is Counterproductive to Data Innovation

The European Data Economy initiative is built on the belief that the current regulatory environment is not adequate in order to unleash the potential of such data-driven economy. The initiative focuses on so-called ‘non-personal data’ as a way to complement data protection rules that regulate the processing of personal data. The article illustrates that the notion of non-personal data as starting point for new data innovation policies is counterproductive for three fundamental reasons: (1) datasets are often mixed and the boundaries of personal data are too fluid to act as regulatory anchor; (2) two separate regimes applicable to opaque datasets might lead to strategic behavior of firms exploiting regulatory rivalry; (3) data has economic value irrespective of its legal classification, and there is no evidence that an elusive zone of non-personal data is more essential as innovation input. We argue that a holistic approach to ‘data’ as such, which a priori incorporates data protection considerations in its design is more likely to deliver successful innovation policy.