How Do Firms Become Different? A Dynamic Model

Matthew Selove
2011 Social Science Research Network  
This paper presents a dynamic investment game in which firms that are initially identical develop assets which are specialized to different market segments. The model assumes there are increasing returns to investment in a segment, for example, due to word-of-mouth or learning curve effects. In equilibrium, firms that are only slightly different focus all of their investment in different segments, causing small random differences to expand into large permanent differences. Even though firms do
more » ... en though firms do not cooperate and do not make threats to punish each other, in the long run they divide the market, reaching the same outcome that they would if they cooperated to maximize joint profits. * I am grateful to my advisor, Birger Wernerfelt, for his support and guidance. Helpful comments were provided
doi:10.2139/ssrn.1845983 fatcat:mqbiyn6evnbuvbpmyfzk4fscza