5. Conclusions
This paper empirically examines the relation between the extent and type of strategic interaction among industry firms and firm performance. We capture the extent of strategic interaction in an industry by computing the competitive strategy measure (CSM) developed by Sundaram et al. (1996) and Lyandres (2006). The absolute value of CSM is used to capture the extent of strategic interaction. Recognizing that a positive CSM corresponds to firms‘ strategies being complements, while a negative CSM describes the case of competition in strategic substitutes, the signed CSM is used to evaluate the impact of the type of strategic interaction. Further, firm performance is evaluated using frontier efficiency methodology. We find that the relation between the degree of strategic interaction and firm efficiency is negative and significant. In addition, the negative relation is more pronounced when firms compete in strategic substitutes. This finding is consistent with the idea that there is significantly more cooperation when actions exhibit strategic complements than when they exhibit strategic substitutes. Results are robust under alternate measures of strategic interaction. Using tariff rate reductions as an exogenous competitive shock in a quasi-natural experiment setting, we confirm that the type of strategic interaction impacts the effect of a competitive shock on firm efficiency. In particular, we find that large reductions in import tariffs have a significant and negative effect on firm efficiency only in industries where firms compete in strategic complements. Finally, we find that frontier efficiency methodology outperforms other measures of firm performance in explaining the relation between strategic interaction and firm performance.
