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Random Walks and Sustained Competitive Advantage

  • Jerker Denrell

    ()

    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    Strategy is concerned with sustained interfirm profitability differences. Observations of such sustained differences are often attributed to unobserved systematic a priori differences in firm characteristics. This paper shows that sustained interfirm profitability differences may be very likely even if there are no a priori differences among firms. As a result of the phenomenon of long leads in random walks, even a random resource accumulation process is likely to produce persistent resource heterogeneity and sustained interfirm profitability differences. A Cournot model in which costs follow a random walk shows that such a process could produce evidence of substantial persistence of profitability. The results suggest that persistent profitability does not necessarily provide strong evidence for systematic a priori differences among firms. Nevertheless, since the phenomenon of long leads is highly unrepresentative of intuitive notions of random sequences, such evidence may still be persuasive.

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    File URL: http://dx.doi.org/10.1287/mnsc.1030.0143
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 50 (2004)
    Issue (Month): 7 (July)
    Pages: 922-934

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    Handle: RePEc:inm:ormnsc:v:50:y:2004:i:7:p:922-934
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