Multimarket Value Creation and Competition
47 Pages Posted: 16 Dec 2018
Date Written: July 1, 2018
We analyze multi-market interactions between firms which must invest limited budgets in value (surplus) creation as well as in competitive rent-seeking activities. Firms are horizontally differentiated on a line segment and compete for multiple markets/prizes which differ in the relative effectiveness of each firm's competitive rent-seeking spending. Each firm faces a dual trade-off: First they must choose how much to invest in value creation versus to spend in rent-seeking competition. Second, they must decide on how to allocate resources across the different markets. When the market values are exogenous (and identical across markets) the intensity of competition is highest for the market in the middle, rather than in (advantaged) markets which are close or in (disadvantaged) markets which are closer to the rival. Counter to what one would expect, greater firm differentiation actually intensifies the competition in the middle markets. When firms endogenously invest in value creation, they invest more in value creation in closer markets and the investments decline towards the middle. This results in the most intense competition moving away from the middle to a market in each firm's turf. The analysis also provides a competitive perspective on the home turf bias phenomenon.
JEL Classification: D21, L13
Suggested Citation: Suggested Citation