Towards a behavioral theory of competitive interactions: A system dynamics approach

Competitive dynamics research has produced compelling insights into how firms use market-oriented moves to attain and sustain competitive advantage. Surprisingly, there has been less integrative research on how combinations of various mechanisms and processes affect competitive dynamics over time. Consequently, we develop a system dynamic model of dyadic competitive interaction by drawing insights from behavioral theory of the firm and evolutionary theory. We show how a small set of existing, well-established behavioral assumptions about how firms employ competitive actions can explain a rich variety of competitive behavior patterns. Our simulations corroborate the robust empirical finding that, generally, a high level of competitive activity leads to high performance. However, competitive actions also incur costs and increase the risk that rivals respond. By implication, managers cannot know with precision if they should increase competitive activity. We explain how this un-resolvable uncertainty surrounding the gains from competitive actions is in itself a sufficient explanation of interfirm performance differences.