When actors compete by manipulating variety distributions for advantage, transaction costs increase substantially compared to independent operation. Each actor must manage not only their own variety distributions but also monitor, anticipate, counter, and respond to competitors' variety distribution changes.
Despite this general increase, a small number of low-cost, high-impact strategies exist that can achieve maximal change to the locus of power at minimal transaction costs.
Baseline: Independent operation
Consider the simplest case: two organisations functioning independently, each managing their own variety distributions and external variety distributions they influence, are influenced by, and respond to. Each incurs transaction costs for:
- Maintaining internal variety distributions
- Managing external variety distributions they influence, are influenced by, and respond to (suppliers, customers, partners, market conditions, regulatory environments)
- Coordinating across variety distributions
- Managing variety distribution changes
- Monitoring their own operations and influenced external domains
These represent baseline transaction costs for variety management. Note that in situations where systems thinking assumptions may not apply (hyper-complex situations), boundaries between internal and external variety distributions are not fixed, and organisations routinely influence, are influenced by, and respond to variety distributions beyond their formal organisational boundaries.
Competition multiplies transaction costs
When actors begin to compete, they manipulate variety distributions to gain advantage over each other. This adds substantial transaction costs beyond the baseline:
Each competitive actor must now:
- Maintain its own variety distributions (baseline cost)
- Monitor competitors' variety distributions (new cost)
- Anticipate competitors' variety distribution changes (new cost)
- Counter competitors' moves (new cost)
- Protect its own variety distributions from interference (new cost)
- Coordinate defensive and offensive variety strategies (new cost)
The competitive context multiplies transaction costs because each actor must now manage both its own variety distributions and respond to opponents' variety distribution manipulations. Resources that could be used productively are diverted to competitive positioning, defence, intelligence gathering, and counter-moves.
Multi-actor complexity
This principle extends to multi-actor competitive situations where transaction costs multiply further. Each actor must monitor, anticipate, and respond to multiple competitors simultaneously. Examples include:
- Multi-party geopolitical conflicts such as the current war in Ukraine, where Russia, Ukraine, NATO members, the US, EU, and various regional actors all compete through variety distribution manipulation
- Historical and current negotiations in the Middle East involving Israel, Palestine, various Arab states, Iran, and external actors (US, EU, China, Russia) competing for influence and access to resources such as oil
In multi-actor situations, transaction costs scale with the number of competitive relationships, as each actor must manage variety strategies relative to all other actors.
Low-cost, high-impact strategies exist
Despite the general increase in transaction costs during competition, a small number of strategies exist that can achieve substantial change to the locus of power at minimal transaction cost. These bypass the escalating competitive costs through concentrated intervention at decisive points.
"Power at a point" strategies represent one such approach: rather than extended competitive variety manipulation (high transaction costs), concentrate intervention at a single decisive point (low transaction costs) that shifts the locus of power. Terry Pratchett's Jingo illustrates this: pointing a crossbow at a ruler's head during complex diplomatic negotiations (minimal transaction cost) creates more power shift than months of diplomatic manoeuvring (high transaction costs).
Surprise attacks represent an extreme case, where temporal asymmetry provides additional advantage. The attacker pays costs once to achieve surprise, then gains variety distribution advantages at zero marginal cost during the defender's response delay, as time passes naturally.
Implications
Transaction cost burden of competition: The primary implication is that competitive engagement substantially increases transaction costs for all actors. Resources devoted to monitoring, countering, and protecting against competitors represent overhead that reduces productive capacity.
Multi-actor escalation: As competitive situations involve more actors, transaction costs multiply. Each additional actor requires monitoring, strategic response, and defensive measures, creating quadratic or exponential cost growth.
Strategic efficiency matters: Understanding transaction cost dynamics enables actors to:
- Recognise when competitive engagement costs exceed benefits
- Identify opportunities for low-cost high-impact interventions
- Evaluate whether competition or cooperation better serves objectives
- Assess when diplomacy from advantageous position is more efficient than continued competition
Diplomatic leverage: Power at a point strategies often serve as prelude to diplomacy, where successful intervention establishes negotiating advantage. The power shift enables diplomatic resolution from position of strength, potentially reducing overall transaction costs compared to extended competition.
Understanding that competition substantially increases transaction costs - while a few low-cost strategies exist - enables actors to make informed strategic choices about when to compete, when to seek advantage through concentrated intervention, and when diplomatic resolution serves interests more efficiently than continued competitive engagement.