Quartz 4

coopetition-framework

6 min read

Co-opetition Framework (Nalebuff/Brandenburger)

Notes from Barry Nalebuff’s lecture slides (Yale, 1996) and how the framework applies to Guild and the distribution platform.

Source: Nalebuff Coopetition.pdf — 60-slide lecture deck

Core idea

Business is simultaneously War and Peace. Cooperation in creating value, competition in dividing it up. Not cycles of war then peace — both at the same time.

“You have to compete and cooperate at the same time” — Ray Noorda, Novell

The Value Net

Nalebuff’s alternative to Porter’s Five Forces. Four player types around your company:

          CUSTOMERS
              |
COMPETITORS — COMPANY — COMPLEMENTORS
              |
          SUPPLIERS
  • Complementor: customers value your product MORE when they also have this player’s product
  • Competitor: customers value your product LESS when they have this player’s product
  • Same player can be both — “Jekyll and Hyde”

The bias: we’re trained to think in terms of competitors. The correction: think complementor as well as competitor.

Supply-side mirror

Same logic applies to suppliers:

  • Complementor: it’s MORE attractive for a supplier to serve you when they also serve this player
  • Competitor: it’s LESS attractive for a supplier to serve you when they also serve this player

Example: Compaq & Dell compete for Intel’s latest chip, but complement each other in defraying Intel’s R&D costs.

PARTS — the five levers

Every game has five elements. Changing any one changes the game.

LeverWhat it means
PlayersWho’s in the game? Bringing in or removing players changes everything
Added valuesWhat does each player uniquely contribute? Your power = your added value
RulesContracts, customs, regulations that structure negotiations
TacticsActions to shape other players’ perceptions
ScopeLinks between this game and other games

Added Value (the key concept)

Added value = total value with you − total value without you

You can never capture more than your added value. This is the fundamental limit.

The card game example: Adam has 26 red cards, 26 people each have 1 black card. A red+black pair = $100. When supply equals demand (26 red, 26 black), the game is symmetric — everyone splits evenly. But when Barry removes 3 black cards (23 remaining), each black card holder now has zero added value (there are more red cards than black). Barry gets a bigger piece of a smaller pie.

This is exactly the distributor allocation game — when supply < demand, the supplier captures all the value.

Key principles

  • Allocentrism: put yourself in others’ shoes to assess added value, anticipate reactions, see how they see the game
  • Irrationality matters: profits aren’t the only objective. Pride, jealousy, fairness drive behavior. Don’t impose your rationality on others
  • Pay me to play: competition is valuable — don’t give it away, get paid to play
  • Healthy imitation: copy strategy, not products. win-LOSE + LOSE-win = lose-lose. win-win + win-win = WIN-WIN
  • Loyalty: create loyalty by rewarding it. Say thank you in kind, not cash. Save the best thank you for your best customers. Say thanks in a way that builds your business (guest passes, referral bonuses)

Applied to Guild / Distribution Platform

Our Value Net

              CUSTOMERS
     (shops: bookstores, game stores)
                  |
COMPETITORS ——— GUILD ——— COMPLEMENTORS
(Withfriends,     |        (Square POS, Hi.Events,
 Bookmanager,     |         publishers, event
 distros)         |         platforms, other shops
                  |         on the network)
              SUPPLIERS
        (distributors: Ingram,
         Alliance, ACD, Universal)

Shops are BOTH competitors and complementors

This is the core insight — the “antique stores in Paris” / “Broadway theaters” example from the lecture.

  • Bookstores compete for the same customers and the same inventory allocations
  • Bookstores complement each other in making the market — a neighborhood with 3 indie shops draws more foot traffic than one shop alone
  • They complement each other on the supply side — more shops ordering from a distributor makes it more attractive for the distributor to serve any one of them

“Complementors in making the market, competitors in dividing the market.”

The card game is the allocation problem

Phil’s “ask 100 get 20” = the card game with scarce supply. Distributors are Adam holding the red cards. Each shop holds a black card. When distributors have less supply than demand, individual shops have zero added value — the distributor captures everything.

The platform changes this by bundling black cards. Instead of 30 shops each negotiating individually (zero added value each), the platform negotiates as one block of 30. The block has massive added value — losing 30 shops at once is meaningful to a distributor.

This is literally what the Hanseatic League did.

Added value analysis

Guild’s added value to shops:

  • Without Guild: shop manages loyalty manually (or not at all), calls distros 4hrs/week, over-inflates orders, gets 20% fill rate
  • With Guild: automated loyalty driving repeat visits, demand data for smarter ordering, coordinated allocation with 80-90% fill rate

Guild’s added value to distributors:

  • Without Guild: process hundreds of inflated individual orders, can’t predict real demand
  • With Guild: one aggregated demand signal from 30+ shops with real sales data. Accurate forecasting. Lower returns. Better relationships

Key risk (from the lecture): undersupply creates ill will, lost sales, lost relationships. This is exactly what’s happening with current distros. We solve it.

Rules we can change

Current rules of the distribution game:

  • Each shop orders independently (custom)
  • Distros allocate by percentage of request (custom)
  • No data sharing between shops (competition mindset)
  • Shops inflate orders because everyone else does (Nash equilibrium breakdown)

Rules we introduce:

  • Shops share sales data with the platform (new contractual arrangement)
  • Platform aggregates demand and negotiates as a block (changing the player structure)
  • Allocation is based on actual sales data, not inflated requests (new rule, transparent)
  • Most-favored-customer clause: shops on the platform get at least as good allocation as non-platform shops

Tactics (perception shaping)

  • Transparency vs. fog: we want the demand side transparent (shops share data) but keep the aggregated intelligence proprietary (our moat)
  • Credibility signal: Dungeon Books uses its own platform first (eating our own dog food). Phil using it second. Real shops, real data, real results
  • “Pay me to play”: shops’ sales data is valuable — they should get paid (in better allocation) for sharing it, not give it away for free

Scope — linked games

The loyalty game and the distribution game are separate games that we’re linking:

  • Loyalty → POS data → demand signal → allocation coordination
  • Winning the loyalty game gives us leverage in the distribution game
  • Long-term contracts (annual subscriptions) link games over time
  • Each new shop on the platform increases added value for all other shops (network effect)

Questions to keep answering (from the lecture)

Players: Who stands to gain if we enter? (small shops). Who stands to lose? (distributors who profit from information asymmetry, Bookmanager)

Added value: Can we create loyal customers AND loyal suppliers? (yes — loyalty platform for customers, demand data for suppliers)

Rules: What rules would we like to have in contracts with shops and distributors? (data sharing requirements, allocation guarantees, most-favored pricing)

Tactics: How do shops currently perceive the distribution game? (zero-sum, adversarial). Which perception do we want to change? (cooperative, positive-sum)

Scope: Do we want to link the loyalty game to the distribution game? (yes — that’s the whole thesis)

Graph View

Backlinks