MCS 6950 - Neil Bendle

Neil Bendle (Ivey School of Business)

http://www.ivey.uwo.ca/faculty/directory/neil-bendle

Competitor Orientation and the Evolution of Business Markets

Abstract
Competitor orientation, the focus on beating the competition rather than maximizing profits, seems to thrive in business situations despite being, by definition, sub-optimal for profit-maximizing firms. Our research explains how a competitor orientation can persist and even thrive in equilibrium in markets that reward only profits. We apply evolutionary game theory to business markets where reputation matters. We use three games that represent classic interactions in marketing channels — Chicken (to illustrate competition for product adoption), variants on the Prisoners’ Dilemma (pricing battles), and the Battle of the Sexes (channel negotiations).
Initial populations are assumed to contain both profit-maximizing managers and competitor-oriented managers (i.e., those who gain additional utility from beating others). We demonstrate that a competitor orientation can survive in equilibrium despite selection that is based solely on profits. Using Chicken, we show that a competitor orientation thrives and can even overrun the population. Using the Prisoners’ Dilemma we show competitor orientation is not selected against. Using the Battle of the Sexes, we show that a competitor orientation will overrun one population in a two-sided negotiation (e.g., all retailers in a retailer/manufacturer dyad). We show that evolutionary profit-driven selection pressures cannot be assumed to eliminate non–profit-maximizing behavior even when selection is based purely on profitability.