Do Firms Endowed with Greater Strategic Capability Earn Higher Profits?

Journal of Marketing Research · 2015 · Volume 52 · Issue 3

Abstract

Firms with different management teams evidence different strategic capabilities. Some are able to reason through the reactions of their competitors, whereas others are less sophisticated in their thinking. In such cases, conventional wisdom suggests that the strategic firms will undercut their less sophisticated competitors’ prices and earn greater profits. The authors show that, under certain conditions, the strategic firms charge higher prices and accrue smaller equilibrium profits than their nonstrategic counterparts. Strategic firms’ efforts to capitalize on their loyal customers’ higher willingness to pay increases nonstrategic firms’ share of price-sensitive consumers. Furthermore, by raising prices, strategic firms help their nonstrategic counterparts more than themselves. This outcome arises when the proportion of consumers loyal to each firm is sufficiently large. A laboratory test for the main proposition's predictive accuracy provides empirical support.

Keywords

behavioral economics, bounded rationality, experimental economics, game theory, pricing

Enable JavaScript for citation tools and additional paper interactions.