Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition

Abstract

Causal ambiguity inherent in the creation of productive processes is modeled by attaching an irreducible ex ante uncertainty to the level of firm efficiency that is achieved by sequential entrants. Without recourse to scale economies or market power, the model generates equilibria in which there are stable interfirm differences in profitability, an above-normal industry rate of return, and a lack of entry even when firms are atomistic price-takers. The free-entry equilibrium for rational noncollusive firms is characterized for atomistic firms and for firms of fixed size, and some analytic results are obtained for the more realistic case in which firms have an arbitrary cost function. Numerical results for the associations implied between concentration, industry profitability, fixed entry costs, and the dispersion of firm profitabilities are obtained for selected cases.