Value Appropriation and Competition Revisited

One of the foundational questions underlying strategy research relates to identifying characteristics of economic situations that enable value appropriation by firms. Recently, MacDonald & Ryall (2004) presented a coalition game based framework within which the mechanism of value appropriation in competitive situations can be formally modeled and analyzed. They subsequently use their formulation to show that an innovator may not necessarily appropriate value from an innovation, even if the innovation is of use to several potential customers who can compete for its use. In this short article, I present a more general partition function based framework to model the strategic competitive interactions among economic agents and their value appropriation possibilities. Subsequently, this alternate formulation is utilized to demonstrate that the “no value appropriation” result found by MacDonald & Ryall (2004) forms a special case, and under fairly general conditions the innovator always appropriates value from her innovation when potential customers compete. Furthermore, the approach provides an intuitive understanding of the mechanism of the innovator’s value appropriation in terms of the relative advantage that the innovation offers a potential customer over his competitors.