Platt Perspective on Business and Technology

Open markets, captive markets and the assumptions of supply and demand dynamics 7

Posted in macroeconomics by Timothy Platt on December 4, 2015

This is the seventh installment to a brief series on underlying assumptions as they arise and play out in economic systems, and in production and marketplace systems (see Macroeconomics and Business 2, postings 230 and loosely following for Parts 1-6.)

I have been discussing the role of friction in business processes, and in systems of businesses as they cooperatively and competitively interact, over the course of the past several installments to this series. And as part of that progression, in Part 6, I outlined a simple model of how business process and microeconomic-level friction create uncertainty, risk and cost. And as part of that I at least noted how this uncertainty also clouds determination of maximum possible returns on effort and investment, and the determination of cost/benefits ratios.

I step back from that line of discussion here to consider overall business strategy as it is shaped by and executed in the face of friction, and the lack of necessary information that comprises it. And as noted in Part 6, I approach this line of discussion, at least to a significant degree in terms of game theory and two of its most basic organizing models: the win-win and the zero-sum game scenarios.

The basic principles of these scenarios are very simple.

• In a win-win game, not only can two contestants simultaneously win: a mutually beneficial outcome can even be necessary in order for anyone to win – at least for some variations on this scenario. This is a scenario that is pursued in negotiations, as negotiation participants who leave the table seeing themselves as having lost, are much less likely to honor the terms of any agreement reached than would participants who saw themselves as having won at least something significant to themselves – even if the other side won too. In fact a perception that the other side sees itself as having won too, can present itself as insurance that they would not try to cheat, or at least not enough to risk this agreement that has just been arrived at.
• In a zero-sum game one side wins all and the other loses all. And in a pure play zero-sum game that is the end of it with no longer-term considerations entering in, at least with regard to this specific now-completed contest.

It is fairly common for planners and strategists to see commerce as following these two models, with business-to-business competition seen as innately zero-sum, and business-to-business collaboration as is found for example in supply chain systems, innately win-win.

• Consider big ticket items and their sales and purchases, such as the retail sale of automobiles or major home appliances. When two retail businesses are actively competing for a same potential customer for this type of business, with each wanting to be the one that makes a sale to them, only one of them can win for successfully completing that sale (at most.) If A makes that sale, B does not and A wins; B loses.
• Now consider business A alone of this dichotomous set, but include the businesses that A collaboratively works with, in its supply chain and larger value chain collaborations that help make its sales possible. If A wins (e.g. makes that sale) then all of the businesses that this retail store works with win too, for the increase in revenue that flows into their shared supply chain system that this retailer can spend on advancing its business – by doing business with them. If A wins these sales contests and continues to do so, that would at least incrementally bring more business and profitability to all of its collaborative partner businesses for their supply chain participation – and they all win.

But in the real world, where business A does not just exclusively collaboratively work with one set of exclusive contract supply chain partners, an improvement in A’s cash flow might not automatically lead to a corresponding increase in revenue generation for all of their partner businesses. And in fact an increase in value from A to its current supply chain partners, might make them an attractive target for other supportive businesses: other potential supply chain partners to move in and in effect take over these collaborations. So win-win can have its nuances and its risks for participating businesses too.

And the zero-sum scenario can have its real world limitations too,

• And particularly if a big winner comes to be seen as violating antitrust or similar laws.
• A might want to be very competitively successful in its industry and marketplace but still strategically want to see its competitors make sales too, so it does not find itself in court for in effect strangling the market by eliminating competition and consumer choice.
• And setting aside considerations of this type, consider the wording that I offered above, when briefly sketching out what “zero-sum” functionally means, where I stated that “in a pure play zero-sum game that is the end of it with no longer-term considerations entering in, at least with regard to this specific now-completed contest.”
• Win-win is predicated on precedence and follow-through, and on the existence and significance of longer-term consequences. Zero-sum for the most part discounts that, addressing the game contest immediately at hand. But in real world contexts, and certainly in any as complex and interactive as would be found in business and economic systems, long-term context is everything. And a recurring zero-sum winner can find they have set themselves up for more challenging and I add costly contests going forward, and particularly if their winning prompts their competitors to enter into more effective supportive win-win business-to-business collaborations that they would now compete with as a whole.

But let’s step back from this flow of argument and discussion and consider how friction would impact on the viability of these two basic game scenarios, and when they would most seem to apply. And I begin this with zero-sum games and a proposition that businesses competing against each other in a market, might see the overall cash flow and profitability potential there, limited. What if a market is saturated, and there are more businesses, collectively trying to make more sales there than there are customers prepared to buy? And add in marketplace and business process friction, where the business participants in this market do not know real-time, all of the information that they would need in order to make ideal world decisions on levels and distributions of inventory to bring in, or how best to time this so as to perfectly coordinate with consumer need and desire.

I am setting up a scenario here that would skew business strategy and its execution more strongly towards a zero-sum approach overall and for all participating businesses, as they all seek to take a proportionately larger percentage of overall market share to meet their own needs.

If A, B, C and D are all competing as more or less equals for what they all see as an overly limited market to successfully sustain all of them, and if each seeks to capture at least a third of all sales in their shared market, that adds up to over 100%. And this up to here has not allowed for any business growth, or any drive to achieve it.

In real markets, competition skews the overall field more towards zero-sum as an extreme than it does toward win-win, but elements of both can and do arise and both from within the marketplace and from outside forces such as regulatory law. And with that point made, I come to the last “to-address” point that I offered at the end of Part 6:

• Then after that, I will discuss how politicians market economic theories and economics-based agendas when they campaign for office, and how that translates into legislation and enacted law, and into marketplace and economic realities. And as noted above, I will discuss this in regulatory and legislative terms. And that will bring me back to the first installment to this series, and its line of discussion.

I will turn to that in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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