Beyond the Reach of the Invisible Hand:
Impediments to Economic Activity,
Market Failures, and Profitability
Dennis A. Yao
The Wharton School， University of Pennsylvania，Philadelphia，Pennsylvania，USA
Strategic Management Journal, Vol. 9, Special Issue: Strategy Content Research. (Summer, 1988), pg. 59-70.
What is the focus of this Paper ?
• In Perfectly Competitive Market :
Good Strategy
Average Return
• In Reality:
Firms make excess profits over long time horizon
• What might account for this outcome?
Main Findings of This Paper
“imperfect competition,” is a necessary condition for
supra-normal profits
Three Causes –
Impediments to Economic Activity (IEA)
• Production Economies and Sunk Cost
• Transaction Costs
• Imperfect Information
Main Findings of This Paper
Production Economies and Sunk Cost
• Production Economies – Three Types
- Economies of Scale (Natural Monopoly): Production Volume of a product AC
Strategy – Information acquisition about future demand
Strategy – Development of understanding among incumbents
- Economies of Learning: Cumulative Volume MC
I have a question here for Learning curve and First mover, P62
- Economies of Scope: Number of Products
Strategy – Benefits from Diversification
AC
Main Findings of This Paper
Production Economies and Sunk Cost
• Sunk Cost
Definition: Costs that cannot be eliminated
Contestability Theory:
- Concentration alone does not imply non-competitive Pricing
- How much does the industry production involve sunk cost ?
Strategy for Enter Deference:
- The extent to which entry costs are sunk
Main Findings of This Paper
• Transactions Cost – a basic cause for market incompleteness
Sources: The costs of excluding non-buyers from the use of a product or service
The costs of communication and information
Strategies:
Goal Alignment, e.g., vertical integration
Free-rider Effects (Not sure whether is it appropriate
to put it here)
Main Findings of This Paper
• Imperfect Information:
- Information originates from seller actions or independent information
providers
- Absence of perfect buyer information
above average profit
- For goods and services for which quality cannot be physically
ascertained before purchase
• Strategies:
- Information orientated, e.g., reputation, differentiation, warranties.
Application of IEA
• Production economies and product differentiation:
Unprofitable for all new firms
Unprofitable for incumbents
• Information failure and capital requirement :
Imperfect information
Restrictions on Capital availability
If production economies and sunk cost at low levels, capital requirement not big obstacle
• Sunk cost and switching cost:
New entrants and firms with low market shares try to reduce switching cost
• Imperfect supply-side information and barriers to imitation:
Firms can be different in their abilities to produce, and this difference may translate into long-term
above average profits
Implications for Strategy
• Among IEAs, imperfect information seemed particularly important and pervasive
• Asymmetry between firms help mitigate the dissipating effect of competition for
the excess profit stream offered by market failures
• First-mover advantage from good ideas may extend beyond that of temporary
profit
• For managers, identifying impediments and exploiting the market failures are
necessary for profitability
Main Point that confused me
For the application part, the author does not state the
relationship between sunk cost and switching cost very clearly.
Future Research
• How to deal with free rider effect?
• This paper uses different examples from different industries to
state a theory. However, there is not much evidence showing
what the paper try to say is a theory rather than a
phenomenon. Besides, one example to explain a finding is not
convincing enough. For future research, maybe we can get more
examples for each industry and then see whether the findings
in the paper is widely applicable and whether it can be
formed into a theory.