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

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.