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The authors use a formal value-based model to study how frictions in the product market affect value creation and value capture. The authors define frictions as incomplete linkages in the industry value chain that keep some parties from meeting and transacting. Frictions, which arise from search and switching costs, vary across markets and over time as, for example, products commoditize and competition becomes more global. Importantly, frictions moderate the intensity of industry rivalry, as well as the efficiency of the market. The authors find that firms with a competitive advantage prefer industries with lower levels of frictions than their disadvantaged rivals.
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