Skip to main content

INSIGHTS BLOG > Playing the Winner-Take-All Market Game, Part 3

Playing the Winner-Take-All Market Game, Part 3

Written on 07 May 2015

Ruth Fisher, PhD. by Ruth Fisher, PhD

A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


In Part 1 of this analysis on Winner-Take-All (WTA) markets, I described the forces contributing to the increasing incidence of WTA markets that we've been seeing over the past few decades in global economies. More specifically, I described two, distinct phenomena that have been enabling fewer individuals to extract larger portions of wealth from global markets: (i) an intra-market shift in leverage that has been enabling fewer individuals to extract more wealth from certain types of markets; and (ii)  an an inter-market shift causing increases in the size of markets, due to the erosion of barriers that had previously prevented regional markets from consolidating globally.

In Part 2 of the analysis, I provided some examples of WTA markets, together with ways of mitigating negative effects in these markets.

In this last part of the analysis, Part 3, I discuss some strategic issues associated with WTA markets.

With the globalization of markets, the value potential for any product or service is much larger than it used to be, when markets were local, regional, or even national. Let’s consider some of the different factors that contribute to a product’s potential value, together with strategic implications for WTA markets: (i) market size, (ii) predominance of social effects, (iii) availability of complementary assets, (iv) power of path dependency, and (v) use of information filtering.

Market Size

There are more people now in the world who have more money to spend on products and services than ever before. The last fifty years in particular have been associated with record economic growth throughout the world. As John V. C. Nye describes it in “Standards of Living and Modern Economic Growth”:

Even for the poorer areas of the Earth, the growth of the last fifty years has been quite remarkable. Excluding the developed nations of North America, Western Europe, and Japan and focusing only on the so-called Third World, we find that per capita economic growth, improvements in life expectancy, and declines in mortality from disease and malnutrition outstripped the performance of the most advanced nations of Europe, Britain, and France, during the Industrial Revolution of 1760–1860 … Indeed, the economic growth of China, South Korea, and Taiwan has been so rapid since the 1960s that their people have seen material improvements in thirty or forty years that took the British, French, and Germans a century or more to attain.

With more people globally having more money to spend, together with the expansion of markets from being regional in size to being global, products and services now have greater market (value) potential, where market potential may be defined as follows.

Market potential is the entire size of the market for a product at a specific time. It represents the upper limits of the market for a product... [M]arket potential is just a snapshot in time. It's a fluid number that changes with the economic environment.

It follows that, as indicated by Frank and Cook and also by Stucke, these markets will attract more wasteful competition by people and resources competing both legitimately and Illegitimately (by cheating or trying to game the system), hoping to get a piece of the pie. Some indications that increasing amounts of (wasteful) resources are being spent on competing in (WTA) markets include: (i) increases over time in lobbying efforts, (ii) increases over time in the number of IP lawsuits, and (ii) increases over time in the wealth of Congress.


Lobbying Efforts

In “Spending on lobbying is actually falling. Or is it?” Alexander Becker reports that while money spent on lobbying has seemed to decrease in recent years, the decreasing trend is being more than offset by increases in “soft lobbying” (emphasis mine).

In 2013, reported lobbying spending hit a five year low, according to the Center for Responsive Politics, falling to $3.24 billion from the previous record of high of $3.55 billion in 2010. And the data available so far suggests that disclosed lobbying expenses in 2014 may continue the downward trend.

Many analysts cite congressional gridlock as a cause. The Washington Post and others have reported this year on another possible explanation: The growing trend toward soft lobbying. In other words, a good chunk of lobbying activity – like campaign activity – has gone dark, which leaves expenditures invisible to the public or to regulators.

And so what looks like a decline may actually be an increase: Interviews and reports on individual companies suggest that the seeming drop in official lobbying is more than offset by an increase in money spent on other less overt forms of influence peddling.


IP Lawsuits

In “A Statistical Analysis of Trade Secret Litigation in Federal Courts,” David S. Almeling, Darin W. Snyder, Michael Sapoznikow, Whitney E. McCollum, and Jill Weader find exponential growth in IP trade secrets lawsuits over time.

Given the large and growing role of trade secrets in the U.S. economy, this article’s first-in-kind status is surprising. Intellectual property (“IP”) generally, and trade secrets specifically, are big business. Economists estimate that IP in the U.S. is worth about $5 trillion, which is equivalent to almost half of the U.S. economy. There is little data on the exact value of trade secrets because trade secrets are, by definition, secret. Economists nonetheless estimate that trade secrets are a large and increasing percentage of IP…

Trade secret litigation in federal courts is growing exponentially. The data show that trade secret cases doubled in the seven years from 1988 to 1995, and doubled again in the nine years from 1995 to 2004. At the projected rate, trade secret cases will double again by 2017.

Furthermore, in “2014 Patent Litigation Study,” PwC finds exponential growth over time in both numbers of patents issued and in numbers of patent lawsuits.

As Chart 1 [Figure 10] illustrates, the annual number of patent actions filed once again establishes a new record high, with close to 6,500 cases filed in 2013. The number of cases has increased at an overall compound annual growth rate (CAGR) of 8% since 1991. However, since 2009, the CAGR of the number of patent cases filed has been 24%, or almost three times the growth over the entire period.

Figure 10


Wealth of Congress

Politicians in general, and Congress in particular have become wealthier over time. From Wealth of Congress:

The latest data calculated by reports on disclosed information from 2012. The latest batch of numbers shows that the 113th Congress had a median net worth of $1,008,767. This is the first time in history that the majority of members are millionaires.

The implication here is that politicians have been increasingly using their positions in government as a means to increase their personal wealth, that is, that there has been an increasing amount of corruption in government. Of course, there’s no proof here that increases in politicians’ wealth is in any way related to spending by suppliers trying to get an edge on their rivals, but…


Social Effects

In his 1899 book “The Theory of the Leisure Class,” Thorstein Veblen first introduced the concept of conspicuous consumption, where people consume visibly high-priced goods as a means of seeking social status. Subsequently, other forms of social impacts on the demand for products and service have been identified, including

•  The snob effect, in which products and services known to be exclusive are desired because consuming them makes consumers part of the exclusive crowd;

•  The bandwagon effect, in which products and services that everyone else is consuming are desired because consuming them makes consumers feel included; and

•  The fear of missing out (FoMO), in which products and services that everyone else is consuming are desired because consuming them relieves consumers’ anxieties that by not consuming the products, they might be missing out on something.

The advents of the Internet, social media, and smartphones have enabled people to constantly see and be seen among others. The increase in exposure that this provides people has led to massive increases in the abilities of people to gain social status through their consumption choices.

I would argue that a large portion of the success (achieved market value) associated with products and services in many WTA markets – especially in entertainment and communications markets – are due to the fact that such products provide vehicles for consumers to gain social status by visibly consuming exclusive and/or popular products and services in those markets. In other words, once a particular product gains a certain level of (exclusivity or) popularity – that is, it achieves critical mass – then social (feedback) effects take over and cause consumption of that product to rapidly increase (go viral) as more and more people seek to jump on the bandwagon.

To the extent that consumption of a product can be used by consumers to gain status among their peers, this factor may be exploited by suppliers attempting to gain an edge on the competition. That is, suppliers can and do appeal to consumers’ need for social status (e.g., Dr. Pepper’s ad: “Be a Pepper!”) as a benefit associated with consuming their products.

Turning, now, to social effects on the producer side, I previously indicated that Winner-Take-All markets often lead to wasteful competition by market participants who enter the market to compete for the top prizes. It has been suggested that some of the excess entry may be due to “irrational beliefs” on the part of suppliers who mistakenly believe that their chances of winning are greater than they actually are. In “Excess Entry in an Experimental Winner-Take-All Market,” Urs Fischbacher and Christian Thöni test this hypothesis in a lab setting using test subjects to run experiments. Their tests did not support the irrational beliefs hypothesis. What they found, instead, however, was that there might very well be social effects that explain why people compete in WTA markets. In particular, WTA markets are known to be very competitive. And what’s particularly interesting is that it’s not just winning in WTA markets that confers social status on participants, but the mere fact of competing in such markets may also confer both public and private benefits as well (emphasis mine):

… [W]e have found excess entry in an experimental winner-take-all market. There is not only excess entry with respect to the social optimum. Even more subjects enter than predicted by any Nash equilibrium. Furthermore, we have shown that the number of entries increases with group size even though in equilibrium no increase is predicted. Irrational beliefs can be disregarded as an explanation of the observed pattern of excess entry... Furthermore, we showed that risk preferences in the usual sense cannot explain excess entry.

[W]e think that the basic difference between a winner-take-all game and a normal market entry game lies in the competition-against-all-others structure. This feature seems to make entering more attractive. We guess that people either have an “illusion of control” or they receive an extra utility from the thrill of competition.

The idea of the thrill of competition is similar to the finding in the behavioral economics literature that people are attracted to games in which there are small chances of large payoffs, such as playing the lottery (see, for example, Prospect Theory).

To the extent that excess entry in WTA markets confers utility on participants in the form of the thrill of competition, not all entry should be considered wasteful, per se. That is, if the act of competing itself, whether or not participants actually win the prize, generates status and/or enjoyment for participants, then resources spent to compete are not fully wasted.


Complementary Assets and Technologies

In a previous analysis, I examined the market for same-day delivery services (e.g., Amazon Fresh, Google Express, Instacart, and others) that have popped up over the last few years. In that analysis, I posed the question: Same-Day Delivery – Why Now?:

So why have same-day delivery start-ups suddenly been popping up now, over the past few years? In fact, what has changed since the late 1990s when Webvan, Kozmo, and other startups tried, but failed, to do the same thing?

There are two separate factors contributing to the recent renaissance of same-day delivery services. The first is the improvement in logistics technologies, which have vastly reduced the costs of operating delivery service networks. The second is the implementation of same-day delivery services by Amazon and Google as a means to other ends.

I noted that advances in tracking systems, telematics, inventory management systems, and delivery route optimization systems have enabled delivery services providers to deliver products to customers much more efficiently than they were able to previously. In other words, these logistics technologies are complementary technologies to the provision of delivery services. They enable delivery services providers to provide delivery services more efficiently; so, these logistics technologies enhance the value of the delivery services market.

More formally, Wikipedia defines complementary assets as follows.

Complementary assets are assets, infrastructure or capabilities needed to support the successful commercialization and marketing of a technological innovation, other than those assets fundamentally associated with that innovation.

R Henderson, in “Profiting from Innovation”, provides some further examples of complementary assets:

What kinds of Complementary Assets provide Advantage?

•  Things you can do

     °  Manufacturing capabilities

     °  Sales and service expertise

•  Things you own

     °  Brand name

     °  Distribution channels

     °  Customer relationships

A large part of the potential value associated with products in WTA markets is determined by whether or not the appropriate complementary assets needed to make that particular product successful are available (at the right place and time) to contribute to its success. For example, the success of Apple’s iPod can be attributed to Apple’s early efforts to create the iTunes store, so iPod users would have an easy, legal means of downloading music to play on their iPods. As another example, upon introducing new products, Apple is also able to draw on its brand name reputation, distribution channels and customer relationships to get new products into customers’ hands immediately on a massive, global scale. The ability to fulfill demand immediately works with users’ needs to feel a part of the new product rollout as it unfolds (i.e., the bandwagon effect), thereby creating customer satisfaction, and, in turn, enhancing Apple’s image.

Producers who are able to utilize more or better complementary assets to promote their products will thus have an edge over the competition in terms of generating product value.

As an aside, when complementary assets contribute to the success of a product, much of the eventual value surrounding the product that is created should be attributed to the complementary assets, and not the product itself (for a more detailed discussion of this issue, see my previous blog post, “Why Is It So Difficult to Sell or Out-License Patents? – Part 2: Seller’s Perspective”). This suggests that much of the value that certain winners in WTA markets have been able to extract may not, in fact, be value that is fully attributable to the winners themselves, but rather also includes value attributable to complementary assets.


Path Dependency

Frank and Cook mention path dependency as a contributing factor towards the formation of WTA markets. Path dependency occurs when small events at the beginning of a process can have a large impact on final outcomes. Path dependency is important when feedback effects serve to propel a product with a small initial gain far ahead of competing products. Whether or not a product manages to get on the right path (trigger the feedback effects) early on is an important determinant of eventual and/or potential market value.

In many cases the trigger is some random event, which makes predicting the eventual winner difficult to do before hand.

Nonetheless, the desire to create the triggers themselves as soon as possible so as to beat out the competition leads companies to spend massive amounts of resources during the early stages of a product’s lifecycle on development and promotion efforts. It was this phenomenon that was behind many of the massive burn rates of start-up companies during the bubble. It is also this same phenomenon that leads movie studios to spend millions of dollars promoting movies before their releases in an effort to generate buzz, which, in turn, they hope will translate into large volumes of ticket sales.


Information Filtering

Two important characteristics of today’s economy include

•  The overwhelming flood of information available to decision makers; and

•  The large risks and uncertainty associated with markets, combined with the associated necessity to make many decisions carefully.

Consequently, any type of information filtering that can be used to simplify decision making will be widely accepted. When it comes to deciding which people to hire or which products to consume, easily accessible filters for product quality include prior successes (in the case of hiring CEOs), certificates and degrees from high quality schools (in the case of new hires), or popularity (in terms of consumption by others). What this means is that, as with path dependency, being able to pass through certain information filters (e.g., having past successes in running companies, having degrees from the right schools, being well-known or popular) becomes an important determinant of eventual/potential market value.

Of course, it also follows that when being able to pass through filters becomes valuable, people will try to game the system by manufacturing fraudulent credentials.

It also follows that competition will spread from the downstream products (e.g., a good job), to upstream markets that facilitate (filter) access to the downstream products (e.g., admission to elite colleges, admission to good high schools, admission to good elementary schools, and all the way back). Driven to the extreme, we see parents scheduling their children’s entire childhoods in an attempt to maximize the probability their children will end up with successful jobs.