Abstract
People participate in markets as buyers and sellers to achieve mutual benefit. Both are trying to solve problems. This chapter describes a model of market transactions and exchange processes, which provides the basis for understanding what affects performance in market competition.
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Notes
- 1.
As Karl R. Popper (1999), the famous philosopher of the twentieth century, says: “all life is problem solving.”
- 2.
A system is an “organized, unitary whole composed of two or more independent parts, components, or subsystem and delineated by identifiable boundaries from its environmental super system” (Kast & Rosenzweig, 1985).
- 3.
- 4.
Property rights result from the rules that the state lays down to organize the society (laws). Property rights on goods and resources therefore regulate the potential conflict for the distribution of scarce resources and goods. In specific, property rights include the authority on use, the authority on acquisition of the profit, the authority on alteration of form and substance, as well as the authority on sale.
- 5.
Exchange contracts cover more than purchase and sales agreements. They also include leasing arrangements, license agreements, credit contracts and employment contracts. In the following, for simplicity, we only refer to purchase and sale in terms of transfer of property rights.
- 6.
- 7.
(Latin) = “I give so that you give” (Roman legal principle).
- 8.
“The central idea here is that when two or more people interact, each expects to get something from the interaction that is valuable to him, and is thereby motivated to give something up that is valuable to others” (Simon, 1978).
- 9.
Selkirk, a Scottish sailor lived for 5 years (1704–1709) on the Chilean island Màs a tierra (Juan-Fernández). He later became famous as the main character and hero in Daniel Defoe’s (1719) novel “The Life and Strange Adventures of Robinson Crusoe”.
- 10.
Here, the term “costs” signifies a sacrifice or damage. For this reason, the use of this expression differs from the usual economic term.
- 11.
This perspective traces back to from the sociological exchange theory which interprets human group behavior as a system of reciprocal rewards and punishment (costs).
- 12.
By property rights we refer to both ownership and usership rights.
- 13.
Regarding the term “problem” the degree of the perceived pressure to solve a problem is irrelevant. There may be different occurrences. The use of the word “problem” varies from everyday language. In everyday language, a “problem” describes a negatively evaluated state of stress that can hardly be overcome or not be managed at all.
- 14.
The perceived pressure to find a solution does not necessarily have to be reduced by the transformation from an initial to a final state. The state of stress can also be reduced by adjusting and subjective readjusting the final to the initial state. For example, in this context irreversible circumstances have to be accepted.
- 15.
Hereby, it is not a matter of lost consequences of the fulfillment but negative consequences that are anticipated by the decider in case of non-fulfillment.
- 16.
For the distinction of egoism and opportunism, see Sect. 1.1.1.2.
- 17.
Alchian (1950) already demonstrates that rational behavior in terms of the homo oeconomicus cannot be reconciled with the assumptions of imperfect information and uncertain predictions. For the signification of uncertainty: see the following section.
- 18.
Here, the use of the term “opportunism” differs from everyday language. In everyday language, opportunism signifies “an opportunity for self-advancement usually with no respect for right or wrong” (The Newbury House online dictionary). We are using this word as a theoretical term according to Williamson.
- 19.
(Latin) = “contracts must be fulfilled” (Roman legal principle).
- 20.
“In the end, trust never can be justified; it is generated by overstressing the available information. It is a mixture of knowledge and ignorance” (Luhmann, 2000).
- 21.
Erich and Monika Streissler (1983) had the brilliant idea to explain the economic exchange theory by means of this exemplary tale.
- 22.
In the following, we will assume ideal conditions which in reality can be more or less restricted. The framework of conditions of the market economy is more or less ensured by the authority of laws: These laws do not only protect property and freedom of contracting but do also prevent violence and fraud.
- 23.
Unlike in the sports sector, the arbitrator customer in the market activities is not bound to the rules of the game apart from the current laws. He is rather making an effort to lay down his own exchange rules. But he does not impart these rules to the suppliers, i.e., he communicates them in a misleading or incomplete way or reserves the right to modify them in the middle of the process. Sometimes the customer himself is not even sure of his own rules. Therefore, the analogy of sports competitions cannot be thoroughly applied to the role of the arbitrator customer.
- 24.
Schneider (1987) introduced the following enlightening illustration regarding the distinction between empirical and analytical objects: Business students sit in a dark theatre (science), and on the stage is reality. This reality can only be seen when the headlights are switched on—by scientists.
- 25.
Commons (1959) provided substantial contributions to the understanding of the transaction as the unit of economic analysis. He made the transaction the final unit of economic examination which represents a unit of transfer of legal control. It makes a classification of all economic decisions of the courts and tribunals of arbitration possible under the various economic factors involved in transactions at the moment they are actually made. Kotler, Keller, and Bliemel (2007, p. 14) make a similar distinction between an exchange process and a transaction. According to them two parties are said to be involved in an exchange process if they are negotiating and moving toward an agreement. A transaction takes place if an agreement is reached. Transactions are the basic unit within an exchange process.
- 26.
Kirzner (1973) writes about a pair of mutually fitting relationships: “Each pair of dovetailing decisions (each market transaction completed) constitutes a case in which each party is being offered an opportunity which, to the best of his knowledge, is the best being offered to him in the market. Each market participant is therefore aware at all times that he can expect to carry out his plans only if these plans do in fact offer others the best opportunity available as far as they know.”
- 27.
It was the English Nobel Prize winner Ronald H. Coase (1937) who introduced this insight to market theory.
- 28.
The relevance and importance of this distinction between a product as a physical resource or capability and the services or benefits that can be provided by using the product or resource is receiving increased attention in the marketing literature of late with the development of the concept of service dominant logic (e.g., Vargo & Lusch, 2004)
- 29.
Bagozzi (1986) mentions the possibility of exchange benefits.
- 30.
A more detailed classification proposed by Albach (1988) is search costs, preparation costs, negotiation costs, decision costs, agreement costs, control costs, and termination costs.
- 31.
March and Simon (1967) describe this behavior as striving for a balance between inducements and contributions. No party wants to contribute more than the value of the inducements it receives.
- 32.
An exchange is not a “zero sum game.” The effects of that for marketing can only be mentioned briefly at this point. For a seller to achieve a positive exchange ratio, it is important not only to create a positive assessment for the buyer and to carry out the exchange, but also to keep costs as low as possible. The buyer and seller have considerable scope for action here. Each strives for a relation between outputs and inputs that is as favorable as possible. A production function is defined as the relation between resource inputs and realized outputs (Gutenberg, 1983). In a similar way, we can define a “marketing function” in terms of the relation between the input costs and the outputs for the market partner. Hence, production, and marketing can be described in terms of productivity. However, an analysis of the marketing function is different from Gutenberg’s. He focuses on the company, whereas we focus on the relationship between a buyer and seller.
- 33.
Asymmetrical means that the principal has less relevant information than the agent. This principal-agent-concept in economic theory explicitly assumes that the principal and agent have different levels of information. It interprets the contractual relations between the parties on the basis of egoistical and opportunistical behavior.
- 34.
Not every transaction is a market transaction. A transaction is an agreement between two parties about what each party gives and receives and is achieved if two parties reach an agreement without any market exchange process. This is the case for instance in labour relations, where party A gives an order to party B which B carries out because they are employed by A.
- 35.
Whether the individual benefit and cost components can be added together we shall leave open at this point. Here we are concerned about but clarifying the structure of an agreement, not about measuring benefits and costs.
- 36.
Friedrich A. von Hayek (1960), the Austrian Nobel Prize winner in economics, describes the market process as a “process to discover facts which would remain undiscovered or at least unused without him”.
- 37.
We use Kirzner’s model to aid our analysis, not for the description of the entire reality. Other outcomes could be imagined, such as sellers that could have sold more had they learned that they have to produce more.
- 38.
For Schumpeter, this encompasses not only new products and product attributes but also new technologies, new resource, and intermediate goods markets.
- 39.
When a good is perfectly uniform or homogeneous in quality, any portion may be indifferently used in place of an equal portion: hence, in the same market, and at the same moment, all portions must be exchanged at the same ratio. There can be no reason why a person should treat exactly similar things differently, and the slightest excess in what is demanded for one over the other will cause him to take the latter instead of the former. Hence it follows what is undoubtedly true, with proper explanation that in the same market, at any one moment, there cannot be two prices for the same kind of article. The principle above expressed is a general law of the utmost importance in Economics, and I propose to call it “The Law of Indifference” (Jevons, 1911).
- 40.
Real markets with features similar to these, particularly those with homogeneous products or services, tend to have intense price competition, which creates a single price and erases major price differences. An example is the mass steel market since the middle eighties. Here, there are no major performance differences and the fight for survival is carried out primarily by means of price and related features. With cost structures being similar and with a supply surplus in the market, hardly any profits are made. That is why most sellers try to cut costs in order to create advantages. Price is the main competitive instrument and the really decisive competitive parameter is cost, which determines survival in market. A seller’s competitive weapons are cost cutting modernization, rationalization, cross subsidies from other business activities in the case of companies with more than one product, and external subsidies as sometimes occurs in international competition. In these situations, attempts are made to organise supplier cartels that regulate the quantity supplied, as has happened in the oil market with the emergence of the Organisation of Petroleum Exporting Companies (OPEC). However, our analysis shows that the market itself will solve the situation anyway by eliminating less efficient suppliers from the market. This can happen on a global basis, which has happened in the steel, shipbuilding, and steel machine industry.
- 41.
This is why the analysis by Gutenberg (1984) focuses on the case of incomplete market knowledge.
- 42.
An example is the quality certification system ISO 9000 developed by the European Commission. At first, sellers that had their quality systems scrutinized and certificated had a competitive advantage. Today, with many sellers having done so, no positive competitive effect remains. Negative competitive effects do remain, in that buyers avoid sellers without a certificate. Kleinaltenkamp (1993) derives the competitive effects of norms and standards for product qualities from Kirzner’s theory: “Accordingly, the existence of product and system standards could be interpreted as an equilibrium regarding the quality of the goods traded in the market.”
- 43.
- 44.
Regarding the classification of sources of competitive advantage see also Engelhardt (1966). The idea of distinguishing between potentials, processes, and program was brought up by Erich Gutenberg who saw all procedures within a company as formed by resource inputs, resource transformations, and resource outputs (Gutenberg, 1989). We shall maintain Gutenberg’s concentration on a company’s productivity when determining competitive advantage from the interplay of potentials (resource input), processes (resource transformation), and program (resource output).
- 45.
An issue here is that of measurement. Customer perceptions and assessments cannot be measured in the same way as those of the seller. Differences in competencies, processes, and program are difficult to quantify. However, an analysis of relevant differences can be carried out. This chapter is not about techniques for measuring a firm’s competitive strength, but about conceptual questions regarding the nature and sources of competitive strength.
- 46.
It is not possible to discuss here whether Porter’s distinction between different value creating activities is useful or not. What matters is the analytical idea to develop instruments that enable a comparison between companies in order to analyze and build on competitive advantages. We will come back to the topic of process structures later.
- 47.
Later, we relate S’s cost advantage over SC to the profit difference between S and SC, in order to eliminate the impact of prices on the definition of competitive advantage (see part 4). However, this does not affect the cost difference criteria as a determinant of competitive advantage.
- 48.
Hammer and Champy (2003) give illustrative examples.
- 49.
In order to simplify and clarify, we assume that we can precisely determine the exchange ratio offered by SC that is preferred by the buyer. We assume further that this offer gives an exchange ratio of 1 for the buyer i.e., costs and benefit are equal.
- 50.
We are not concerned with the quantifiability of every feature in our definition, but with the analysis of competitive strength.
- 51.
See a similar approach in Forbis and Mehta (1981). Here, the authors’ definition of competitive advantage is problematic because they concentrate on the difference between the benefit orientated upper price limit of the seller and its average costs. This cannot be used to measure competitive advantage, because you cannot compare costs and profits between a seller and its competitor in this way. Therefore, we focus on profit differences between the relevant sellers.
- 52.
The algebraic notation should not give the impression that we only treat quantifiable elements when analyzing costs and benefits. On the contrary, the contents of an exchange ratio, as outlined in above, contain all value components, both positive and negative, as perceived by the buyer. The quantification in expression 1) therefore is a task not yet solved. We use the expression in order to clarify the structure of the concept, not as a mathematical formula.
- 53.
The term “buyer advantage” was introduced by Große-Oetringhaus (1990): “Understanding marketing strategically means satisfying a buyer’s needs better than competitors. This relative degree of satisfaction we shall call buyer advantage.” Forbis and Mehta (1981) mean the same when using the term “economic value to the customer.”.
Customer advantage has to be distinguished clearly from the term consumer surplus used in microeconomical theory since Alfred Marshall [see for instance Stackelberg (1951)]. Consumer surplus describes the difference between the market price and the highest price at which a customer would buy, whereas customer advantage is about the difference in price of an individual competitor. The term consumer surplus is derived from the conditions of atomistic competition, whereas the concept of customer advantage treats a situation of oligopolistic competition with heterogeneous performances and limited market knowledge.
- 54.
The idea in Fig. 1.20 is the same as in Fig. 1.17. Those sellers with lower average costs realize higher profits per unit sold. Microeconomic theory calls this difference between the market price and the lowest price at which a seller would sell “producer surplus.” However, this is not related to the individual competitor’s situation, but to the market price in atomistic competition.
- 55.
This is why in an actual business situation, it is essential to choose the right seller for comparison. However, it is not the model’s application that we are concerned with. Here, we are defining the seller’s competitive actions in terms of buyer advantage.
- 56.
“Every business firm occupies a position which is in some respects unique. Its location, the product it sells, its operating methods, or the customers it serves tend to set it off in some degree from every other firm. Each firm competes by making the most of its individuality and its special character. It is constantly seeking to establish some competitive advantage. Absolute advantage in the sense of an advanced method of operation is not enough, if all competitors live up to the same high standards. What is important in competition is differential advantage, which can give a firm an edge over what others in the field are offering.”
- 57.
The business literature contains various terms for competitive advantage. Alderson (1957) introduced it into marketing theory, referring back to J. M. Clark’s theory of monopolistic competition. Rogers (1962) used the term “relative advantage” as a determinant of the success of product innovations. Ansoff uses the term “distinctive competence”. In consumer advertising, the term “Unique Selling Proposition” is well known. Porter (2004) writes about “competitive advantage”, and so does Simon (1988). Aaker (2001), calls it “Sustainable Competitive Advantage (SCA)”.
- 58.
- 59.
We can only discuss this problem briefly here. For additional discussion, see Reed and De Filippi (1990).
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Exercises
Exercises
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1.
What options exist for the purchase of goods and for sales?
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2.
What is an exchange?
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3.
Why do exchanges exist?
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4.
What value can result from an exchange?
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5.
What is a problem and a problem solution?
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6.
Explain the causes of uncertainties which can be connected with an exchange.
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7.
What is a risk and what kind of possibilities are there for managing a risk?
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8.
What is the difference between a simple exchange and an extended exchange?
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9.
What are the characteristics of a buyer’s market and a seller’s market?
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10.
What is a market transaction?
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11.
What are the elements of a market transaction?
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12.
Explain the benefits and the costs resulting from a transaction.
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13.
What is the difference between a buyer’s perspective and a sellser’s perspective?
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14.
Explain the conditions for the emergence of a transaction.
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15.
What is a market process?
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16.
Describe the terms “innovation” and “imitation.”
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17.
Explain the elements of a competitive advantage.
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18.
Describe the causes of competitive advantages?
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19.
Describe the terms “efficiency” and “effectiveness.”
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20.
Explain the connections between effectiveness with seller advantage and efficiency with buyer advantage.
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Plinke, W., Wilkinson, I. (2015). The Market Process. In: Kleinaltenkamp, M., Plinke, W., Wilkinson, I., Geiger, I. (eds) Fundamentals of Business-to-Business Marketing. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-12463-6_1
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