Title: Beyond%20the%20Reach%20of%20the%20Invisible%20Hand:%20Impediments%20to%20Economic%20Activity,%20Market%20Failures,%20and%20Profitability
1Beyond the Reach of the Invisible Hand
Impediments to Economic Activity,Market
Failures, and Profitability
Strategic Management Journal, Vol. 9, Special
Issue Strategy Content Research. (Summer, 1988),
pg. 59-70.
By Amit Jain
2MARKETS ARE EFFICENT
3Basic Relationships
Impediments to Econ Activities (IEAs)
Market Failure
Entry Barriers
1. Entry barriers as operational combinations of
IEAs 2. IEAs cause market failure 3. Absent IEAs,
entry barriers may not cause market failure
4Shortcomings of Economic Theory
- The Efficient Market
- Consumers and producers act as price takers
- Markets exist for all commodities
- Buyers and sellers have complete information
- Thus, all firms will make normal (average)
profits - Perfectly competitive markets lead to long-run
profits that are average - Good strategy leads to survival, not excess
profits
- So why do we observe companies making excess
profits? - Market failure has created supra-normal
profitability - Strategists are interested in identifying factors
that create an imperfect market (i.e. imperfect
competition)
5Industrial Organization Barriers to Entry A
source of market failure
- Industrial Organization (IO) Literature
- Barriers to Entry (Bain 1956, Caves and Porter
1977), such as product differentiation or capital
requirements - Example of product differentiation
- The perception of a product as being different
works only if the buyer is uninformed about the
products in the market - Absence of cost-effective credible information
- Imperfect information
- Therefore, there is more to market failure (and
more sources) than B2E
6Impediments Theory another source of market
failure
- Transaction Costs
- Production Economies
- Sunk Costs
- Imperfect Information
7Transaction Costs
- Two relevant types
- Free-rider problem Costs of excluding non-buyers
from use of a product or service - Excluding non-subscribers from benefits of
product review - Costs of communication and information
- Writing long-term contracts when all future
contingencies cannot be predicted - Strategies for dealing with transaction costs
- Vertical integration
- Culture change match employees goals with
organizations goals - Develop long-term relationships with outside
organizations
8Production Economies, Sunk Costs, Imperfect
Information
- Production Economies
- Economies of Scale, Learning Curve, Economies of
Scope - Sunk Costs
- In absence of sunk costs, entry and exit become
costless (contestible markets) - Imperfect Information
- Absence of perfect buyer information leads to
above average price-cost margins - Ways to exploit provide information oriented
strategies - Reputations brand loyalty.
- Product differentiation through advertising
- Signaling quality through warranties
- Price reflects Quality high price, high
quality.
9Concluding Thoughts and Comments
- The paper integrates B2E with IEA.
- However, the papers implications on transaction
costs is limited. - Heres an extended definition The firm exists by
minimizing transaction costs, which includes
costs associated with opportunism, complexity,
and uncertainty. - Can transaction costs theory encompass
impediments theory? - Since production economies (quasi-rents), sunk
costs (sunk investments), and imperfect
information (uncertainty) are handled within the
boundaries of the firm, then transaction costs
may be sufficient.
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