The Role of Competitive Amplification in Explaining Sustained Performance Heterogeneity

36 Pages Posted: 12 Aug 2019 Last revised: 13 Sep 2019

Date Written: July 16, 2019

Abstract

This paper presents a formal model that elucidates how sustained performance heterogeneity emerges from competitive amplification due to endogenous resource investment under uncertainty. Specifically, the model shows that if resources are scale free, any small resource differences are amplified into large performance differences, leading to high firm-specific heterogeneity in an industry, and vice versa for resources with low scalability. This finding provides a theoretical explanation for the empirical observation that firm-specific components of performance heterogeneity in the variance decomposition studies are significantly larger in some sectors than in others. Consistent with the predictions of the model, the empirical analysis in this paper confirms that industries with more scale free resources on average exhibit higher firm-specific heterogeneity.

Keywords: formal foundations of strategy, resource based view, game theory, variance decomposition studies, investment under uncertainty

JEL Classification: L1, L25

Suggested Citation

Wibbens, Phebo D., The Role of Competitive Amplification in Explaining Sustained Performance Heterogeneity (July 16, 2019). INSEAD Working Paper No. 2019/41/STR, Available at SSRN: https://ssrn.com/abstract=3433923 or http://dx.doi.org/10.2139/ssrn.3433923

Phebo D. Wibbens (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau
France

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