The Cue-Ball Effect: How An Advantaged Firm’s Closer Competitors Can Propagate the Impact of Its Advantage to More Distant Competitors

Author Information

Natarajan Balasubramanian, Whitman School, Syracuse Univerity
Richard Makadok, Ohio State University
Wan Ting Chiu, Purdue University



Journal 
Strategic Management Journal

Summary of the Paper
Changes in competitive advantage of a firm can propagate to distant competitors of that firm and hurt them more than closer competitors.

Research Questions
Suppose some firm gains a cost advantage. Then, is it the case that the closest competitor will be affected the most? Can a distant competitor be more affected than a closer competitor? If so, when?

What We Know
If a firm gains a cost advantage, the generally accepted wisdom is that the competitors closest to that focal firm would be most affected.  Yet, Whole Foods, a high-end firm in the grocery industry suffered a performance decline (and sold itself to Amazon) after the entry of Walmart, a low-end player. Why might that happen?

Novel Findings
If a firm gains a cost advantage, the competitors closest to that focal firm may not always be the most affected. If the closer competitor can move away from the focal firm, then a distant competitor may be hurt more than the closer competitor. Our economic model of this “cue-ball effect” predicts that the impact propagated onto upper-end competitors is greater in markets with less income inequality, and our empirical results are consistent with this prediction.


Citation
Balasubramanian, N., Makadok, R.  & W.T. Chiu. The Cue-Ball Effect: How An Advantaged Firm’s Closer Competitors Can Propagate the Impact of Its Advantage to More Distant Competitors. Forthcoming at the Strategic Management Journal

Abstract
Cost advantage helps a firm at the expense of its rivals, but may hurt some rivals worse than others. Conventional wisdom suggests that an advantaged firm will do more harm to closer competitors, but the opposite may occur if competitors can reposition themselves. Closer competitors have stronger incentives to reposition away from the advantaged firm, thereby potentially encroaching on rivals more distant from the advantaged firm and propagating the harm to them, like the cue ball in billiards transfers energy from cue stick to target ball. Our formal model compares an advantaged firm’s closer and farther competitors, when repositioning is allowed or prohibited, and demonstrates when its advantage hurts farther competitors worse than closer ones. We provide an illustrative case study from grocery retailing.