Nike is a famous global athletic brand. The story of early Nike is perhaps best captured in the 2016 memoir, Shoe Dog, written by co-founder Phil Knight. In a 2022 podcast with Bill Brewster, retail analyst Simeon Siegel had the following to say about the company:
While it hadn’t occurred to me directly when reading this, the reason this market looks this way is because its a Sutton Market. See attached on something I am working on in draft form.
202410250914 - Concept - Industry Structure - Entry Barrier Market or a Sutton Market.pdf (85.0 KB)
Oh my. Ok, this is really, really good — I need to take this concept seriously. Is this covered primarily in The New Goliaths? @ajzitz
Thank you - I’ve been working hard on this one. It is covered in the New Goliaths, but other places too: Economics of Strategy, 7th Edition (first time I saw it); academic papers exist too (Does Sutton Apply to Supermarkets); Sutton has a book, Sunk Cost and Market Structure and it looks like PDF copy is floating around.
@ajzitz thanks so much for sharing this. Really insightful and interesting. I’ve not come across the idea of Sutton Markets or MES before.
Can i just check my understanding of this phrase: “In other words, through branding, firms can endogenously increase the MES. This is what allows the leaders to break away.” Are you saying that over time there is a cumulative intangible asset (or brand equity) built up that becomes harder and harder to catch up with from scratch?
Also, is this paper you shared part of a book you’re writing? Or just your own notes on key concepts? I have a few other things to read now just based on the references!
@michaeljon - I am glad you enjoyed this as I put a lot of work into thinking through this idea. Treatments of this idea are in Bessen’s book, Sutton’s book, (Sunk Costs and market structure), and Economics of Strategy, 7th edition.
To your question, yes, that is what I am saying. Companies have discretion and control over what they spend versus some technology, which is exogenous and affects all the same.
In the case of brands, its an intangible investment. But, to use another example, Amazon has made significant investments into its delivery / logistics infrastructure to achieve quality (i.e. quick shipping). So, this is not intangible, but rather tangible but at their discretion.
Sutton noted advertising and R&D are endogenous sources of costs, but I think the Amazon example is another way to think about the idea not in those categories.
I am going to great pains to differentiate exogenous from endogenous, with the latter being in managements control and at their discretion.
No book for me! This is a concept according to the CFT system Cedric speaks about that goes [case] - [concept] - [case]. So, I will write a case and link back to this.
For instance, I read Emperors of Chocolate, and certain inventions came to be like the enrober, which is similar to bessemer process allowing for scale. Later, Hershey and Mars really started to advertise and get the distribution to squeeze others out. So, I am kind of thinking this was an entry barrier market that became a Sutton one! Basically, in any book I read where I see major inflections in industry structure, I will probably link to this conept.
This idea is not fully fleshed out yet though. Sorry for the long post.
Good paper here on Sutton and supermarkets, or distribution as an endogenous fixed cost http://paulellickson.com/DoesSuttonApply.pdf