Entry, Investment and Exit in Response to an Industry Shock: Effect of Firm Limited Foresight and Myopic Discounting

47 Pages Posted: 13 Feb 2010

Multiple version iconThere are 3 versions of this paper

Date Written: February 12, 2010

Abstract

An important question in strategy is how firms adapt to a fundamental change in industry conditions. However, there is wide divergence in the extent to which firms are considered to be forward-looking in setting strategy in such a context. I focus on the effect of differences in two aspects of forward-looking strategy setting, foresight and myopia, in a formal model of how firms within an industry respond to a shock that leads to a long-run transition in the industry. I consider exogenous shocks to ease of resource accumulation over time, but initial firm heterogeneity and competitive interactions leads to a more complex, involved transition, from initial response through to long-run changes, due to the potentially different endogenous response of firms to the shocks. I find distinctive investment, entry and exit patterns that depend on the extent of foresight and myopia. Thus, from the perspective of a focal firm the choice of strategy is affected by other firm's foresight and myopia, as these shape the other firm's response to a shock and thus the competitive landscape faced by the focal firm.

Keywords: Firm and industry dynamics; Foresight; Myopia; Resources; Entry; Exit

Suggested Citation

Costantini, James, Entry, Investment and Exit in Response to an Industry Shock: Effect of Firm Limited Foresight and Myopic Discounting (February 12, 2010). Atlanta Competitive Advantage Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1551723 or http://dx.doi.org/10.2139/ssrn.1551723

James Costantini (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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