The cue-ball effect: How an advantaged firm's closer competitors can propagate the impact of its advantage to more distant competitors

Research SummaryCost 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.Managerial SummaryWhen Walmart brought its advantage in distribution efficiency to the low end of the grocery retailing industry, it displaced the inefficient downscale incumbent Winn-Dixie in many geographic areas. One might have expected such increased efficiency at the low end of the market to hurt midscale supermarkets like Kroger more than premium grocers like Whole Foods, yet the opposite occurred. Why? In a word, repositioning. Midscale competitors retreated away from Walmart by repositioning upscale via renovations, which thereby transferred the impact to premium rivals who could not escape any further upscale. 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.