Competitive Overlap and Expert Partner Choice

Strategy & Business Policy

Speaker: Balazs Kovacs

Associate Professor - Yale University

Conference  Jouy-en-Josas T015

Abstract:

In market networks, firms regularly turn to other firms to supply expertise critical to their operations yet not held within the firm. Should firms seek partners with the needed expertise while avoiding second order competitive overlap, i.e., partners who also serve their competitors, or should they seek partners who also work with their competitors? Contrary to arguments in existing literature using a ”pipes” view of relationships which predict the avoidance of partners serving competitors, we adopt a ”prisms” view and argue that second order overlap serves as a signal of expertise which positively affects partner choice under uncertainty. The signal effect is strongest when alter-centric uncertainty is highest - for new partners, for nascent industries and for new technologies. We test our arguments for the effect of competitive overlap on expert partner choice in the context of the selection of patent law firms by inventing firms (i.e., clients) and we find robust evidence for our predictions. Nevertheless, in a twin-patent analysis, we also find that competitive overlap negatively affects performance outcomes: patents handled by law firms with higher levels of competitive overlap are of lower value and take longer to get accepted. Relying on the competitive overlap signal in partner selection reduces search costs, but at the expense of lower performance post-selection.