IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v52y2006i5p757-772.html
   My bibliography  Save this article

Interdependency, Competition, and the Distribution of Firm and Industry Profits

Author

Listed:
  • Michael J. Lenox

    (Fuqua School of Business, Duke University, P.O. Box 90210, Durham, North Carolina 27708)

  • Scott F. Rockart

    (Fuqua School of Business, Duke University, P.O. Box 90210, Durham, North Carolina 27708)

  • Arie Y. Lewin

    (Fuqua School of Business, Duke University, P.O. Box 90210, Durham, North Carolina 27708)

Abstract

Coordination of interdependencies among firms' productive activities has been advanced as a promising explanation for sustained heterogeneity in capabilities among firms. In this paper, we extend this line of research to determine the industry structures and patterns of expected firm profits for the case when difficulty optimizing interdependent activities does, in fact, generate and sustain capability heterogeneity among firms. We combine a widely used agent-based model where firms search to discover sets of activities that complement one another (reducing overall costs or raising product quality) with traditional economic models of competition among profit-maximizing firms. The agent-based model produces a distribution of performance (interpreted as variable cost or product quality) among firms and the competition models determine resulting industry outcomes including patterns of entry, exit, and profits. The integration of economic models of competition among firms with an agent-based model of search for improvement by firms reveals a rich relationship between interdependencies in production functions and industry structure, firm profits, and industry average profitability.

Suggested Citation

  • Michael J. Lenox & Scott F. Rockart & Arie Y. Lewin, 2006. "Interdependency, Competition, and the Distribution of Firm and Industry Profits," Management Science, INFORMS, vol. 52(5), pages 757-772, May.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:5:p:757-772
    DOI: 10.1287/mnsc.1050.0495
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1050.0495
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.1050.0495?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Paul J. H. Schoemaker, 1990. "Strategy, Complexity, and Economic Rent," Management Science, INFORMS, vol. 36(10), pages 1178-1192, October.
    2. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
    3. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    4. ANITA M. McGAHAN & MICHAEL E. PORTER, 1997. "How Much Does Industry Matter, Really?," Strategic Management Journal, Wiley Blackwell, vol. 18(S1), pages 15-30, July.
    5. Daniel A. Levinthal, 1997. "Adaptation on Rugged Landscapes," Management Science, INFORMS, vol. 43(7), pages 934-950, July.
    6. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    7. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 339-376.
    8. Rebecca Henderson & Iain Cockburn, 1996. "Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 32-59, Spring.
    9. Jan W. Rivkin, 2001. "Reproducing Knowledge: Replication Without Imitation at Moderate Complexity," Organization Science, INFORMS, vol. 12(3), pages 274-293, June.
    10. Massini, Silvia & Lewin, Arie Y. & Greve, Henrich R., 2005. "Innovators and imitators: Organizational reference groups and adoption of organizational routines," Research Policy, Elsevier, vol. 34(10), pages 1550-1569, December.
    11. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    12. Szulanski, Gabriel, 2000. "The Process of Knowledge Transfer: A Diachronic Analysis of Stickiness," Organizational Behavior and Human Decision Processes, Elsevier, vol. 82(1), pages 9-27, May.
    13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    14. Milgrom, Paul & Roberts, John, 1995. "Complementarities and fit strategy, structure, and organizational change in manufacturing," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 179-208, April.
    15. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    16. Jan W. Rivkin, 2000. "Imitation of Complex Strategies," Management Science, INFORMS, vol. 46(6), pages 824-844, June.
    17. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael J. Lenox & Scott F. Rockart & Arie Y. Lewin, 2007. "Interdependency, Competition, and Industry Dynamics," Management Science, INFORMS, vol. 53(4), pages 599-615, April.
    2. Arie Y. Lewin & Silvia Massini & Carine Peeters, 2011. "Microfoundations of Internal and External Absorptive Capacity Routines," Organization Science, INFORMS, vol. 22(1), pages 81-98, February.
    3. Puay Khoon Toh & Gautam Ahuja, 2022. "Integration and appropriability: A study of process and product components within a firm's innovation portfolio," Strategic Management Journal, Wiley Blackwell, vol. 43(6), pages 1075-1109, June.
    4. Hazhir Rahmandad, 2019. "Interdependence, Complementarity, and Ruggedness of Performance Landscapes," Strategy Science, INFORMS, vol. 4(3), pages 234-249, September.
    5. Ennen, Edgar & Richter, Ansgar, 2009. "The Whole Is More Than the Sum of Its Parts - Or Is It? A Review of the Empirical Literature on Complementarities in Organizations," MPRA Paper 15666, University Library of Munich, Germany.
    6. Thorbjørn Knudsen & Daniel A. Levinthal & Sidney G. Winter, 2014. "Hidden but in plain sight: The role of scale adjustment in industry dynamics," Strategic Management Journal, Wiley Blackwell, vol. 35(11), pages 1569-1584, November.
    7. Jan W. Rivkin, 2001. "Reproducing Knowledge: Replication Without Imitation at Moderate Complexity," Organization Science, INFORMS, vol. 12(3), pages 274-293, June.
    8. Zand, Fardad & Van Beers, Cees & Van Leeuwen, George, 2011. "Information technology, organizational change and firm productivity: A panel study of complementarity effects and clustering patterns in Manufacturing and Services," MPRA Paper 46469, University Library of Munich, Germany.
    9. Bryan Hong & Lorenz Kueng & Mu-Jeung Yang, 2015. "Estimating Management Practice Complementarity between Decentralization and Performance Pay," NBER Working Papers 20845, National Bureau of Economic Research, Inc.
    10. Myong-Hun Chang, 2009. "Industry dynamics with knowledge-based competition: a computational study of entry and exit patterns," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(1), pages 73-114, June.
    11. Jason P. Davis & Vikas A. Aggarwal, 2020. "Knowledge mobilization in the face of imitation: Microfoundations of knowledge aggregation and firm‐level innovation," Strategic Management Journal, Wiley Blackwell, vol. 41(11), pages 1983-2014, November.
    12. Bryan Hong & Lorenz Kueng & Mu-Jeung Yang, 2019. "Complementarity of Performance Pay and Task Allocation," Management Science, INFORMS, vol. 65(11), pages 5152-5170, November.
    13. Felipe A. Csaszar & Nicolaj Siggelkow, 2010. "How Much to Copy? Determinants of Effective Imitation Breadth," Organization Science, INFORMS, vol. 21(3), pages 661-676, June.
    14. Jan W. Rivkin, 2000. "Imitation of Complex Strategies," Management Science, INFORMS, vol. 46(6), pages 824-844, June.
    15. Priit Vahter & Maaja Vadi, 2022. "The Relationship Of Technological And Organizational Innovation With Firm Performance: Opening The Black Box Of Dynamic Complementarities," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 138, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    16. Scott F. Rockart & Nilanjana Dutt, 2015. "The rate and potential of capability development trajectories," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 53-75, January.
    17. Daniel W. Elfenbein & Adina D. Sterling, 2018. "(When) Is Hiring Strategic? Human Capital Acquisition in the Age of Algorithms," Strategy Science, INFORMS, vol. 3(4), pages 668-682, December.
    18. Jan W. Rivkin & Nicolaj Siggelkow, 2003. "Balancing Search and Stability: Interdependencies Among Elements of Organizational Design," Management Science, INFORMS, vol. 49(3), pages 290-311, March.
    19. Christopher B. Bingham & Kathleen M. Eisenhardt, 2008. "Position, leverage and opportunity: a typology of strategic logics linking resources with competitive advantage," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(2-3), pages 241-256.
    20. Helmut M. Dietl & Markus Lang & Eric Lucas & Dirk Martignoni, 2012. "Learning Through Inaccurate Replication," Working Papers 312, University of Zurich, Department of Business Administration (IBW).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:52:y:2006:i:5:p:757-772. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.