Entry, Investment and Exit in Response to an Industry Shock: Effect of Firm Limited Foresight and Myopic Discounting
47 Pages Posted: 13 Feb 2010
Date Written: February 12, 2010
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
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