Frictions and Competitive Positioning: How Transaction Costs Influence Bargaining and Market Power

Abstract: Market power (the short-term ability to raise price above marginal cost) and bargaining power (how much value one can potentially capture from a transaction) are central constructs in competitive strategy research. Positioning theory focuses on attempts to build, protect, and exercise market power and bargaining power. However, absent transaction costs, parties made worse off by the exercise of market and bargaining power may be able to exercise countervailing power by forming coalitions, negotiating, and otherwise contracting around the focal firm’s attempts to appropriate monopoly profits. We use cooperative game theory to show how the effectiveness of countervailing power depends on particular kinds of transaction costs.