The Social Structure of Competition

Reading for "The Social Structure of Competition" By Ronald S Burt

The market production equation of profit:

Investment x rate of return= Profit

Economists concern Investment as financial and human capital in this equation. Burt suggested that the social capital, i.e. the player’s network and the location of the player’s contacts in the social structure of arena, attributes the rate of return, which is ultimately deciding factor of profits. The social capital in one’s social structure provides the competitive advantage in getting higher rates of return on investment.

A player brings three kinds of capitals to the market, they are: 1) Finical capital; 2) Human capital; and 3) Social capital.

The distinguishing social capital

Social capital differs from financial and human capital is owned jointly by the parties of relationship. While financial and human capital concern the production capabilities, social capital concerns the transformability from the financial and human capitals into profit. Social capital therefore is the final arbiter of competitive success.

The above is especially true when facing imperfect competition and with abundant investment capital. Empirical evidence shows that people develop relations with people like themselves. The players with well structured networks will easily obtain useful and reliable information at the right timing. The truth of such information is critical when market is imperfect. That will lead to higher rates of return.

Structure holes provides information benefit

When one’s network increases, the efforts to maintain the relationship within network are also expected to increase. Burt found that it is not how many contacts, but what kind of contacts within networks matter.

Structure hole refers to a relationship of nonredundancy between two contacts. Balancing network size and diversity is a question of optimizing structure holes, for that is the key to information benefits.

In order to optimize the structure holes, one should firstly maximize the number of nonredundant contacts in the network to maximize the yield in structure holes per contact. Secondly, one should focus on primary contacts, which link to secondary contacts and save his energy to maintain the diversity of network. Burt’s argument consistent with Granovetter’s weak ties concept, however, Burt stressed that weak tie is a correlate, not a cause; structure holes is where the true cause for information benefits. Whether the weak or strong relationships are, the structure hole generates information benefits when it is a bridge over a structure holes.

Burt concluded that players with a network optimized for structural holes enjoy higher rates of return on their investments because they know more and have more rewarding information.

Structure holes provides control benefits

Besides providing information benefits, according to Burt, structural holes also give certain players an advantage in negotiating their relationship.

Taken from the work of George Simmel, the tertius gaudens is the third who benefits. The tertius strategies are being the third after two or more players after the same relationship; and being the third between players in two or more relations with conflicting demands.

The control benefits of structure holes require an active hand in distribution of information. Entrepreneur behavior is kind of tertius. Motivation is often traced to cultural beliefs and psychological need.

Structure holes provide an entrepreneurial opportunity and motivation. The non redundant relationships an entrepreneur has will provide him strategic information and opportunity.

Structure hole offers a new dimension of theory of competition

1. Competition is a matter of relationships, not player attributes. Structural holes arguments escape the traditional social science practicing in using player attributes for explanation. The causal effects are rather of the network relations. A player’s physical attributes are a correlate, not a cause of competitive success. This analysis is to cut past the spurious correlations between attributes and outcomes to reach the underlying social structural factors that cause the outcome.
2. Competition is a relation emergent, not observed. The structural holes in which competition develops are invisible relations of nonredundancy, relation visible only by their absence.
3. Competition is a process, not just result, by which the price and occurrence of transaction is decided.
4. The structure hole argument suggests that competition made imperfect by the freedom of individuals to be entrepreneurs. Competition is imperfect to the extent that any player can affect the terms of any particular relationship.