Beyond the reach of the invisible hand: Impediments to economic activity, market failures, and profitability

In this paper it is argued that failures of the competitive market are necessary conditions for supranormal profitability. Three fundamental causes of these market failures-production economies and sunk costs, transactions costs, and imperfect information-are developed from the theory of competitive...

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Bibliographic Details
Published in:Strategic management journal 1988, Vol.9 (S1), p.59-70
Main Author: Yao, Dennis A.
Format: Article
Language:English
Subjects:
Barriers
Capital costs
Commercial production
Economic competition
Economic costs
Economic theory
Economies of scale
Imperfect information
Industrial market
Market failure
Perfect competition
Profitability
Profits
Strategic planning
Sunk costs
Transaction costs
Windfall profits
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Summary:In this paper it is argued that failures of the competitive market are necessary conditions for supranormal profitability. Three fundamental causes of these market failures-production economies and sunk costs, transactions costs, and imperfect information-are developed from the theory of competitive markets and discussed in terms of their impact on profitability. The identification of these `impediments to economic activity' is useful for determining successful strategies to exploit market failures.
ISSN:0143-2095
1097-0266
DOI:10.1002/smj.4250090707