Transaction surplus superiority in canonical market segments: Using the profit map to guide positioning and investment choices across price‐rivalry regimes

Research Summary: Strategy needs an “intermediate measure” of competitive strength easily linked to management choices. “Competitive advantage” fails to accomplish this because most formulations of it violate important criteria and because these formulations are so diverse. I show that one intermediate measure, transaction surplus superiority (TSS), potentially solves both problems. Critically, TSS is defined independently of prices and its usefulness is independent of the degree of price competition: In “canonical” market segments, firms with TSS always make superior segment profits (gross of sunk investments) compared to rivals. When combined with a restriction to “incentive‐compatible pricing behavior,” TSS limits or solves the theoretical problem of indeterminate rivalry among oligopolists. Finally, TSS allows precise explanation of when sunk investments to improve efficiency are stimulated or suppressed by the “spur of competition.” Managerial Summary: Executives need a conceptual “instrument panel”—“intermediate measures” of competitive strength—to help choose their products and processes. Profit itself is too causally remote from these choices to serve. “Competitive advantage” has been defined in ways that either just mean superior profits or that depend on strong assumptions about price competition that frequently don't apply. Transaction Surplus Superiority (TSS) solves these problems. In an important special case, a “profit map” completely describes each firm's profitability for any combination of price competition and TSS. For choices where sunk cost differences typically aren't important (e.g., product color or inventory policy), TSS is a universal guide to action. TSS helps decide whether to increase price competition to gain market share, and it largely determines whether a given investment in efficiency makes sense.