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

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  • Dennis A. Yao

Abstract

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.

Suggested Citation

  • Dennis A. Yao, 1988. "Beyond the reach of the invisible hand: Impediments to economic activity, market failures, and profitability," Strategic Management Journal, Wiley Blackwell, vol. 9(S1), pages 59-70, June.
    • Handle: RePEc:bla:stratm:v:9:y:1988:i:s1:p:59-70
    DOI: 10.1002/smj.4250090707
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    Cited by:

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    6. Felix Oberholzer-Gee & Dennis A. Yao, 2018. "Integrated Strategy: Residual Market and Exchange Imperfections as the Foundation of Sustainable Competitive Advantage," Strategy Science, INFORMS, vol. 3(2), pages 463-480, June.
    7. Sadok El Ghoul & Omrane Guedhami & Yongtae Kim, 2017. "Country-level institutions, firm value, and the role of corporate social responsibility initiatives," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(3), pages 360-385, April.
    8. Deligonul, Seyda & Kim, Daekwan & Roath, Anthony S. & Cavusgil, Erin, 2006. "The Achilles' heel of an enduring relationship: Appropriation of rents between a manufacturer and its foreign distributor," Journal of Business Research, Elsevier, vol. 59(7), pages 802-810, July.
    9. Spulber, Daniel F, 1994. "Economic Analysis and Management Strategy: A Survey Continued," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(2), pages 355-406, Summer.
    10. Jongwook Kim & Joseph T. Mahoney, 2002. "Resource-based and property rights perspectives on value creation: the case of oil field unitization," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(4-5), pages 225-245.
    11. Sorrentino, Mario & Williams, Mary L., 1995. "Relatedness and corporate venturing: Does it really matter?," Journal of Business Venturing, Elsevier, vol. 10(1), pages 59-73, January.
    12. Boyd Cohen & Brock Smith & Ron Mitchell, 2008. "Toward a sustainable conceptualization of dependent variables in entrepreneurship research," Business Strategy and the Environment, Wiley Blackwell, vol. 17(2), pages 107-119, February.
    13. Cheng, Lei & Sun, Zhen, 2021. "The white elephant in IP management market frictions, market connections and escalation of commitment," China Economic Review, Elsevier, vol. 67(C).
    14. Bucheli, Marcelo & Mahoney, Joseph T. & Vaaler, Paul M., 2007. "Chandler's Living History: The Visible Hand of Vertical Integration in 19th Century America Viewed under a 21st Century Transaction Costs Economics Lens," Working Papers 07-0111, University of Illinois at Urbana-Champaign, College of Business.
    15. Haram Seo & Jiao Luo & Aseem Kaul, 2021. "Giving a little to many or a lot to a few? The returns to variety in corporate philanthropy," Strategic Management Journal, Wiley Blackwell, vol. 42(9), pages 1734-1764, September.
    16. Mo Chen & Aseem Kaul & Brian Wu, 2019. "Adaptation across multiple landscapes: Relatedness, complexity, and the long run effects of coordination in diversified firms," Strategic Management Journal, Wiley Blackwell, vol. 40(11), pages 1791-1821, November.
    17. Davis, Lee, 1999. "R&D Investments, Information and Strategy," Working Papers 10-1999, Copenhagen Business School, Department of International Economics and Management.
    18. Mohammad Keyhani & Moren Lévesque & Anoop Madhok, 2015. "Toward a theory of entrepreneurial rents: A simulation of the market process," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 76-96, January.
    19. Moshe A. Barach & Aseem Kaul & Ming D. Leung & Sibo Lu, 2019. "Strategic Redundancy in the Use of Big Data: Evidence from a Two-Sided Labor Market," Strategy Science, INFORMS, vol. 4(4), pages 298-322, December.
    20. Jiao Luo & Aseem Kaul, 2019. "Private action in public interest: The comparative governance of social issues," Strategic Management Journal, Wiley Blackwell, vol. 40(4), pages 476-502, April.
    21. Marcelo Bucheli & Joseph T. Mahoney & Paul M. Vaaler, 2010. "Chandler's Living History: "The Visible Hand" of Vertical Integration in Nineteenth Century America Viewed Under a Twenty-First Century Transaction Costs Economics Lens," Journal of Management Studies, Wiley Blackwell, vol. 47(s1), pages 859-883, July.
    22. Kim, Jongwook & Mahoney, Joseph T., 2005. "Appropriating Economic Rents from Resources: An Integrative Property Rights and Resource-Based Approach," Working Papers 05-0123, University of Illinois at Urbana-Champaign, College of Business.
    23. Kenneth G Huang & Jiatao Li, 2019. "Adopting knowledge from reverse innovations? Transnational patents and signaling from an emerging economy," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(7), pages 1078-1102, September.
    24. Giovanni Gavetti, 2012. "PERSPECTIVE—Toward a Behavioral Theory of Strategy," Organization Science, INFORMS, vol. 23(1), pages 267-285, February.

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