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COtnlllentary 35,5/6
A General Theory of Competition:
issues, answers and an invitation
524
Shelby D. Hunt
Department of Marketing, Texas Tech University, Lubbock, Texas, USA Keywords Competition, Marketing theory, Resource management, Productivity,
Economic growth
Abstract Resource-advantage theory is an interdisciplinary, evolutionary, process theory of
competition that is proving to be extraordinarily provocative. A General Theory of Competition:
Resources, Competences, Productivity, Economic Growth pulls together many of the articles that
develop the theory. This article provides a brief overview ofresource-advantage theory, reports on
two quen'es that have been raised by the theory's critics, responds to the two queries, and extends
an invitation to readers.
Introduction
European Journal of Marketing, Vol. 35 No. 5/6. 2001, pp. 524-548. U MCB University Press, 0309-0566 The resource-advantage theory of competition (hereafter, R-A theory) is
interdisciplinary in the sense that it has been developed in the literatures of
several different disciplines, including marketing (Falkenberg, 2000; Foss,
2000; Hodgson, 2000; Hunt, 1997a, 1999, 2000a, 2000b; Hunt et al., 2001; Hunt
and Morgan, 1995, 1996, 1997), management (Hunt, 1995, 2000c; Hunt and
Lambe, 2000), economics (Hunt, 1997b, 1997c, 1997d, 2000d, 2001) and general
business (Hunt, 1998; Hunt and Duhan, 2001). R-A theory is also
interdisciplinary in that, as shown in Table I, it draws on and has affinities
with numerous other theories and research traditions, including evolutionary
economics, "Austrian" economics, heterogeneous demand theory, differential
advantage theory, the historical tradition, industrial-organization economics,
the resource-based tradition, the competence-based tradition, institutional
economics, transaction cost economics, and economic sociology. At least in part
because of its interdisciplinary nature, R-A theory has always been provocative
(Hunt and Morgan, 1996, 1997).
A General Theory of Competition (Hunt, 2000a) - hereafter, GTC - pulls
together many of the articles that develop R-A theory in the diverse disciplines.
As with the articles, GTCs provocative, interdisciplinary nature has prompted
questions, critiques, and commentaries. Most commentators find many aspects
of GTC to be commendable. For example, Lusch (2000, p. 126) finds that,
because of GTCs "unifying and integrative nature ... it should be especially
useful to educators, managers, and public policymakers". Likewise, Falkenberg
(2000, p. 7) feels "confident that the text will serve as a useful tool for
understanding markets and competition, that it will inspire further research in
the area, and that it will be required reading for students of marketing and
strategy." Nonetheless, numerous issues concerning GTC have been raised. For
Research tradition
Representative works
1. Evolutionary
Marshall (1890)
Schumpeter (1934, 1950)
A1chian (1950)
Nelson and Winter (1982)
Langlois (1986)
Dosi et al. (1988)
Witt (1922)
Foss (1993)
Hodgson (1993)
2. Austrian
Mises (1920, 1949)
economics Hayek (1935, 1948)
Rothbard (1962)
Kirzner (1979, 1982)
Lachmann (1986)
3. Heterogeneous
Chamberlin (1933)
demand theory Smith (1956)
Alderson (1957, 1965)
McCarthy (1960)
Myers (1996)
4. Differential
Clark (1954, 1961)
advantage theory Alderson (1957, 1965)
economics 5. Historical
tradition North (1981, 1990)
Chandler (1990) Landes (1998) 6. Industrialorganization
economics
Mason (1939)
Bain (1954, 1956)
Porter (1980, 1985)
7. Resource-based
tradition Penrose (1959)
Lippman and Rumelt (1982)
Rumelt (1984)
Wemerfelt· (1984)
Dierickx and Cool (1989)
Barney (1991, 1992)
8. Competence-based Selznick (1957)
tradition Andrews (1971)
Hofer and Schendel (1978)
Hamel and Prahalad (1989,
1994a, 1994b)
Prahalad and Hamel (1990,
1993)
Teece and Pisano (1994)
Day and Nedungadi (1994)
Aaker (1995)
Sanchez et at. (1996)
Heene and Sanchez (1996)
Sanchez and Heene (1997)
Affinities with R-A theory
Competition is an evolutionary,
disequilibrating process. Finns have
heterogeneous competences. Path
dependencies can occur
A General
Theory of
Competition
525
Competition is a knowledge­
discovery process. Markets are in
disequilibrium. Entrepreneurship is
important. Value is subjective.
Intangibles can be resources
Intra-industry demand is
substantially heterogeneous.
Heterogeneous supply is natural.
"Product" should be defined broadly
Competition is: dynamic; both
initiatory and defensive; and
involves a struggle for advantages.
General equilibrium is an
appropriate welfare ideal
History "counts". Firms are entities
that are historically situated in space
and time. Institutions influence
economic performance
Firm's objective is superior financial
performance. Marketplace positions
determine relative perfonnance.
Competitors, suppliers and customers
influence performance
Resources may be tangible or
intangible. Firms are historically
situated combiners of heterogeneous,
imperfectly mobile resources
Competition is disequilibrating.
Competences are resources. Renewal
competences prompt proactive
innovation. Firms learn from
competing. Firms are embedded
(continued)
Table I.
The pedigree of
resource-advantage
theory
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35,5/6
526
Research tradition
9. Insitutional
economics
Veblen (1899, 1904) Commons (1924, 1934) Hamilton (1932) Kapp (1976) Neale (1987) Mayhew (1987) DeGregori (1987) Ranson (1987) Hodgson (1994) 10. Transaction cost Coase (1937) economics
Williamson (1975, 1985, 1996) 11. Economic
sociology
Table 1.
Representative works
Parsons and Smelser (1956) Granovetter (1985, 1994) Etzioni (1988) Coleman (1990) Zukin and Di Maggio (1990) Powell and Smith-Doerr (1994) Smelser and Swedberg (1994) Scott (1995) Uzzi (1996) Fligstein (1995) Affinities with R-A theory
Competition is disequilibrating.
"Capital" is more than just physical
resources. Resources have
"capabilities"
Opportunism occurs. Many resources
are firm-specific. Firm-specific
resources are important
Insitutions can be independent
variables_ Social relations may be
resources_ Economic systems are
embedded
Source: Hunt (2000a)
example, Foss (2000) finds GTC to be too eclectic, i.e. too interdisciplinary,
whereas Hodgson (2000), in contrast, argues that it is not eclectic or
interdisciplinary enough. Furthennore, Savitt (2000) finds GTC to be too
incremental in its approach, while Foss (2000), in contrast, believes it is not
incremental enough. Finally, Savitt (2000) finds GTC to be too neoclassical,
while Foss (2000) believes it not neoclassical enough. (See Hunt (2000b) for a
response to these critiques.)
The purpose of this article is to address two issues that have been raised by
numerous conference participants (and others) concerning GTC. As to the first
issue, a foundational premise of R-A theory is that the primary objective of
finns is "superior financial perfonnance". Critics question: Is this not just
"profit maximization" or "wealth maximization" in disguise? That is, are not the
differences between profit maximization and superior financial perfonnance
unimportant, a distinction without a difference? Second, GTC is a general
theory of competition that is not mathematized, yet it incorporates perfect
competition as a special case. Some critics query: How can GTC be a general
theory of competition when it lacks equations? Others question: Shouldn't
perfect competition theory be abandoned, rather than incorporated as a special
case? I first provide a brief overview of resource-advantage theory. I then
develop the preceding two queries in some detail, respond to them, and extend
an invitation.
An overview of resource-advantage theory
R-A theory is a general theory of competition that describes the process of
competition. Figures 1 and 2 provide a schematic depiction of R-A theory's key
constructs and Table II provides its foundational premises. Our overview will
follow closely the theory's treatment in GTC (Hunt, 2000a).
The structure of R-A theory
Using Hodgson's (1993) taxonomy, R-A theory is an evolutionary,
disequilibrium-provoking, process theory of competition, in which innovation
and organizational learning are endogenous, firms and consumers have
imperfect information, and in which entrepreneurship, institutions, and public
policy affect economic performance. Evolutionary theories of competition
require units of selection that are:
• relatively durable, i.e. that can exist, at least potentially, through long
periods of time; and
• heritable, i.e. that can be transmitted to successors.
For R-A theory, both firms and resources are proposed as the heritable, durable
units of selection, with competition for comparative advantages in resources
constituting the selection process.
At its core, R-A theory combines heterogeneous demand theory with the
resource-based theory of the firm (see premises Pl, P6 and P7 in Table II).
Contrasted with perfect competition, heterogeneous demand theory views
intra-industry demand as significantly heterogeneous with respect to
consumers' tastes and preferences. Therefore, viewing products as bundles of
attributes, different market offerings or "bundles" are required for different
market segments within the same industry. Contrasted with the view that the
firm is a production function that combines homogeneous, perfectly mobile
factors of production, the resource-based view holds that the firm is a combiner
of heterogeneous, imperfectly mobile factors, which are labeled "resources".
These heterogeneous, imperfectly mobile resources, when combined with
heterogeneous demand, imply significant diversity as to the sizes, scopes, and
levels of profitability of firms within the same industry. The resource-based
theory of the firm parallels, if not undergirds, what Foss (1993) calls the
"competence perspective" in evolutionary economics and the "capabilities"
approaches of Teece and Pisano (1994) and Langlois and Robertson (1995).
As diagramed in Figures 1 and 2, R-A theory stresses the importance of:
• market segments;
• heterogeneous firm resources;
• a comparative advantage/disadvantage in resources; and
• marketplace positions of competitive advantage/disadvantage.
In brief, market segments are defined as intra-industry groups of consumers
whose tastes and preferences with regard to an industry'S output are relatively
A General
Theory of
Competition
527
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Societal Resources
Resources
• Comparative Advantage
• Parity
• Comparative Disadvantage
Competitors-Suppliers
Societal Institutions
Market Position
• Competitive Advantage
• Parity
• Competitive Disadvantage
Consumers
Financial Performance
• Superior
• Parity
• Inferior
Public Policy
Note: Competition is the disequilibrating, ongoing process that consists of the constant struggle among firms for a comparative
advantage in resources that will yield a marketplace position of competitive advantage and, thereby, superior financial performance.
Firms learn through competition as a result of feedback from relative financial performance "signaling" relative market position, which,
in turn signals relative resources.
Source: Hunt and Morgan (1997)
Relative Resource-Produced Value
Lower
1
Re. \ex ti v{
Lower
R~S)u('c.~
CoS-\S
Parity
2
4
3
Competitive
Advantage
529
5
Competitive
Disadvantage
Competitive
Disadvantage
Superior
Competitive
Advantage
Indeterminate
Position
7
Higher
Parity
II
Parity
Position
8
Competitive
Disadvantage
Competitive
Advantage
&
Indeterminate
Position
Note: The marketplace position of competitive advantage identified as Cell 3
results from the firm, relative to its competitors, having a resource assortment that
enables it to produce an offering for some market segment(s) that (a) is perceived to be
of superior value and (b) is produced at lower costs.
Source: Adapted from Hunt and Morgan (1995)
Pl P2 P3 P4 P5 P6 P7 P8 P9
A General
Theory of
Competition
Demand is heterogeneous across industries, heterogeneous within industries, and
dynamic
Consumer infonnation is impetiect and costly
Human motivation is constrained self-interest seeking
The firm's objective is superior financial petiormance
The firm's infonnation is impetiect and costly
The firm's resources are financial, physical, legal, human, organizational,
informational and relational
Resource characteristics are heterogeneous and impetiectly mobile
The role of management is to recognize, understand, create, select, implement and
modify strategies
Competitive dynamics are disequilirium-provoking, with innovation endogenous
Source: Adapted from Hunt and Morgan (1997) homogeneous. Resources are defined as the tangible and intangible entities
available to the firm that enable it to produce efficiently and/or effectively a
market offering that has value for some marketing segment(s). Thus, resources
are not just land, labor, and capital, as in neoclassical theory. Rather, resources
can be categorized as financial (e.g. cash resources, access to financial markets),
physical (e.g. plant, equipment), legal (e.g. trademarks, licenses), human (e.g.
the skills and knowledge of individual employees), organizational (e.g.
competences, controls, policies, culture), informational (e.g. knowledge from
Figure 2.
Competitive position
matrix
Table n.
Foundational premises
of resource-advantage
theory
European
Journal of
Marketing
consumer and competitive intelligence), and relational '(e.g. relationships with
suppliers and customers). Each firm in the marketplace will have a unique set
of resources (e.g. very knowledgeable employees, efficient production
processes, etc.) that could constitute a comparative advantage in resources that
35,5/6
could lead to positions of advantage (cells 2, 3, and/or 6 in Figure 2) in the
marketplace. Some of these resources are not easily copied or acquired (i.e. they
530
are relatively immobile). Therefore, such resources (e.g. culture and processes)
- - - - - - - may be a source of long-term competitive advantage in the marketplace.
Just as international trade theory recognizes that nations have
heterogeneous, immobile resources, and it focuses on the importance of a
comparative advantage in resources to explain the benefits of trade, R-A theory
recognizes that many of the resources of firms within the same industry are
significantly heterogeneous and relatively immobile. Therefore, analogous to
nations, some firms will have a comparative advantage and others a
comparative disadvantage in efficiently and/or effectively producing particular
market offerings that have value for particular market segments.
Specifically, as shown in Figure 1 and further explicated in Figure 2, when
firms have a comparative advantage in resources they will occupy marketplace
positions of competitive advantage for some market segment(s). Marketplace
positions of competitive advantage then result in superior financial
performance. Similarly, when firms have a comparative disadvantage in
resources they will occupy positions of competitive disadvantage, which will
then produce inferior financial performance. Therefore, firms compete for
comparative advantages in resources that will yield marketplace positions of
competitive advantage for some market segment(s) and, thereby, superior
financial performance. As Figure 1 shows, how well competitive processes
work is significantly influenced by five environmental factors: the societal
resources on which firms draw, the societal institutions that form the "rules of
the game" (North, 1990), the actions of competitors, the behavior of consumers
and suppliers, and public policy decisions.
Consistent with its Schumpeterian heritage, R-A theory places great
emphasis on innovation, both proactive and reactive. The former is innovation
by firms that, although motivated by the expectation of superior financial
performance, is not prompted by specific competitive pressures - it is
genuinely entrepreneurial in the classic sense of entrepreneur. In contrast, the
latter is innovation that is directly prompted by the learning process of firms'
competing for the patronage of market segments. Both proactive and reactive
innovation contribute to the dynamism of R-A competition.
Firms (attempt to) learn in many ways - by formal market research, seeking
out competitive intelligence, dissecting competitors' products, benchmarking,
and test marketing. What R-A theory adds to extant work is how the process of
competition itself contributes to organizational learning. As the feedback loops
in Figure 2 show, firms learn through competition as a result of the feedback
from relative financial performance signaling relative market position, which,
in tum, signals relative resources. When firms competing for a market segment
learn from their inferior financial performance that they occupy positions of
A General
competitive disadvantage (see Figure 2), they attempt to neutralize and/or
Theory of
leapfrog the advantaged firm(s) by acquisition and/or innovation. That is, they
Competition
attempt to acquire the same resource as the advantaged firm(s) and/or they
attempt to innovate by imitating the resource, finding an equivalent resource,
or finding (creating) a superior resource. Here, "superior" implies that the
531
innovating firm's new resource enables it to surpass the previously advantaged
competitor in terms of either relative efficiency, or relative value, or both.
------Firms occupying positions of competitive advantage can continue to do so if:
• they continue to reinvest in the resources that produced the competitive
advantage; and
• rivals' acquisition and innovation efforts fail.
Rivals will fail (or take a long time to succeed) when an advantaged firm's
resources are either protected by such societal institutions as patents or the
advantage-producing resources are causally ambiguous, socially complex,
tacit, or have time compression diseconomies.
Competition, then, is viewed as an evolutionary, disequilibrium-provoking
process. It consists of the constant struggle among firms for comparative
advantages in resources that will yield marketplace positions of competitive
advantage and, thereby, superior financial performance. Once a firm's
comparative advantage in resources enables it to achieve superior performance
through a position of competitive advantage in some market segment(s),
competitors attempt to neutralize and/or leapfrog the advantaged firm through
acquisition, imitation, substitution, or major innovation. R-A theory is,
therefore, inherently dynamic. Disequilibrium, not equilibrium, is the norm. In
the terminology of Hodgson's (1993) taxonomy of evolutionary economic
theories, R-A theory is non-consummatory: it has no end-stage, only a never­
ending process of change. The implication is that, though market-based
economies are moving, they are not moving toward some final state, such as a
Pareto-optimal, general equilibrium.
On superior financial performance
As shown in Table II, premise P4 in GTC proposes that the primary objective
of the firm is superior financial performance. Both neoclassical commentators
and behaviorally-oriented scholars criticize this premise. From a neoclassical
perspective, superior financial performance is argued to offer no advantages
over profit (or wealth) maximization. Indeed, the substitution of superior
financial performance for maximizing performance sacrifices, for no good
reason according to critics, the ability to express economic relationships in
mathematical equations that can be solved for maxima and minima using
differential calculus. In contrast, behaviorally-oriented scholars criticize
superior financial performance because it does not acknowledge such firm
objectives as guaranteeing employment to employees, producing
environmentally-friendly products, and being responsible corporate citizens in
European
Journal of
Marketing
the locations in which they operate. Indeed, argue behavioralists, superior
financial performance is "Anglo-centric" and does not acknowledge cultural
differences among different market-based economics. My approach here will be
to present GTCs arguments for superior financial performance. In doing so, I
35,5/6
will address both the neoclassical and behavioralist criticisms.
Note that Table II shows that the firm's primary objective of superior
532
financial performance (P4) is pursued under conditions of imperfect and often
- - - - - - - costly to obtain information about extant and potential market segments,
competitors, suppliers, shareholders, and production technologies (P5). Note
also that P3 posits human motivation to be constrained, self-interest seeking,
that is, humans are constrained in their self-interest seeking by their personal
moral codes (see Hunt, 2000a, pp. 118-21). Consistent with the "self-interest
seeking" component of constrained, self-interest" seeking, GTC argues that
superior financial performance is the firm's primary objective because superior
rewards flow to the owners, managers, and employees of firms that produce
superior financial results. These rewards include not only such financial
rewards as stock dividends, capital appreciation, salaries, wages, and bonuses,
but also such nonfinancial rewards as promotions, expanded career
opportunities, prestige, and feelings of accomplishment.
Because it enables firms to pursue other objectives, such as contributing to
social causes or being a good citizen in the communities in which it operates,
financial performance is viewed as primary. In response to behavioralist
complaints, GTC does not ignore nonfinancial objectives; it just does not posit
them as primary. For-profit organizations differ from their not-for-profit
cousins in that the former, but not the latter, are for profit. Indeed, prolonged
inferior performance threatens the firm's survival and prevents the
accomplishment of secondary objectives.
The "superior" in superior financial performance equates with both more
than and better than. It implies that firms seek a level of financial performance
exceeding that of some referent. For example, the indicators of financial
performance can be such measures as accounting profits, earnings per share,
return on assets, and return on equity. The referent against which the firm's
performance is compared can be the firm's own performance in a previous time­
period, the performance of rival firms, an industry average, or a stock-market
average, among others. Both the specific measures of financial performance
and the specific referents used for comparison purposes will vary somewhat
from time to time, firm to firm, industry to industry, and culture to culture.
That is, for R-A theory, both measures and referents are independent variables.
Therefore, GTC does not ignore differences among cultures. Rather, the theory
provides a framework for investigating the different understandings of
financial performance among different cultures and, most importantly, the
consequences of these different understandings on firms, industries,
productivity, economic growth, and social welfare.
Consider, for example, the issue of "short termism", i.e. the claim that US
firms have short time horizons (compared with Japan, for example), which
results in firms pursuing short term profits instead of (presumably) more
A General
desirable, long-term investments. Many writers claim that short-termism is a
Theory of
serious problem in the USA and locate the cause of the problem in the
Competition
institutions that influence the financial indicators used by US managers to
gauge performance. For example, both Jacobs (1991) and Porter (1990, 1992a,
1992b) claim that fluid and impatient capital markets in the USA raise the cost
533
of capital for US firms by overemphasizing short-term performance. In
contrast, in Germany and Japan, where banks and other large shareholders - - - - - - ­
rarely trade their shares, long-term capital appreciation is more highly (and, for
Porter and Jacobs, more correctly) valued.
The point to be emphasized here is not whether short-termism exists in the
USA or whether it is a major problem or whether impatient capital is its major
cause. Rather, the point to be emphasized is that GTC acknowledges that
different firms (and industries) in different societies may employ different
indicators and referents of financial performance. Therefore, R-A theory
provides a framework in which the questions "which indicators?" and "which
referents?" make sense. In doing so, it provides a theoretical foundation for
empirical research on these questions.
Superior financial performance does not equate with the neoclassical
concepts of "abnormal profits" or "rents" (i.e. profits differing from the average
firm in a purely competitive industry in long-run equilibrium). Because GTC
views industry long-run equilibrium as a theoretical abstraction and a rare
phenomenon, the concept of "normal" profits in the neoclassical tradition
cannot be an empirical referent for comparison purposes. In this regard, note
that industry average performance is not a suitable proxy for "normal" profits
because industries seldom, if ever, are in long-run equilibrium. Note further
that the actions of firms that collectively constitute competition do not force
groups of rivals to "tend toward" equilibrium. Instead, the pursuit of superior
performance implies that the actions of competing firms are disequilibrating,
not equilibrating. Indeed, consistent with "Austrian" economics, markets
seldom if ever are in long-run equilibrium, and activities that produce turmoil
in markets are societally beneficial because they are the engine of economic
growth: "Capitalism, then, is by nature a form or method of economic change
and not only never is but never can be stationary" (Schumpeter, 1950, p. 82).
Positing that the firm's goal is superior financial performance ensures that
R-A theory is dynamic, which accords well with the extant dynamism of
competition in market-based economies. It is no accident that static equilibrium
theories assume profit or wealth maximization. But "saving the equations"
through profit maximization has a price. If a firm is already making the
maximum profit, why should it absent environmental shocks - ever change
its actions? For example, if a firm is maximizing profits producing a product at
a certain quality level, why should it ever attempt to improve quality? Why
should it ever innovate? If, however, firms are posited to: always seek more
profits, higher earnings per share, and greater return on investment; and they
European
Journal of
Marketing
believe that there are always actions that can be taken to accomplish these
goals; then competition will be dynamic, and innovations will be pursued.
Nelson and Winter (1982, p. 4) maintain that "firms in our evolutionary
theory ... [are] motivated by profit and ... search for ways to improve profits",
35,5/6
which differs from "profit maximizing over well defined and exogenously given
choice sets". Likewise, Langlois (1986, p. 252) points out that, though economic
534
"agent[s] prefer more to less all things considered," this "differs from
- - - - - - - maximizing in any strong sense." Similarly, though R-A theory posits that
firms seek superior financial performance, the general case of competition is
that they do not "strong sense" maximize because managers lack the capability
and information to maximize (Simon, 1979). That is, although firms prefer more
profits to less profits, a higher return on investment to a lower return, a higher
stock price to a lower stock price, more shareholder wealth to less wealth,
imperfect information implies that none of these financial indicators equates
with profit or wealth maximization.
Real firms in real economies are not presented a menu of well-defined sets of
alternatives for which the problem is to choose the profit or wealth-maximizing
option. Firms do indeed take actions; they do indeed take note of financial
indicators; and they do indeed make causal attributions between actions and
indicators. But even if - and this is a big if - managers have good reasons to
claim to know that actions previously taken have led (or will lead) to increases
in financial performance, they cannot know (or warrantedly claim to know) that
some alternative action or set of actions (identified or not identified) would not
have produced (or will not produce) even higher returns. Therefore superior
financial performance, not maximum performance, better describes the firm's
primary objective.
In addition to informational problems, firms do not "strong sense" maximize
because of the personal moral codes of owners, managers, and subordinate
employees, as those codes are influenced by cultural, religious, legal, corporate,
and professional norms. Note that agency theory and transaction cost
economics in the neoclassical tradition assume the personal moral codes to be
universal self-interest maximization and universal opportunism (Fama, 1980;
Fama and Jensen, 1983; Jensen and Meckling, 1976; Williamson, 1975, 1985,
1996). In terms of ethical theory, all economic agents are ethical egoists at all
times: they ignore deontological considerations, assign zero importance
weights to all stakeholders other than self, and maximize the ratio of good
consequences over bad (Beauchamp and Bowie, 1988).
In contrast, GTC posits that personal moral codes, instead of being
universally the same, are independent variables that vary across people (and
peoples). Moral codes entail, at the minimum:
• the deontological norms (i.e. this is right; that is wrong) that an
individual applies to decision situations;
• the rules for resolving conflicts among norms;
• the importance weights assigned to different stakeholders; and
• the combinatory rules for merging the deontological and teleological
evaluation processes (Hunt and Vitell, 1986, 1993).
A General
Theory of
Competition
Thus, GTC acknowledges that nonowner managers guided by ethical egoism
will not profit maximize when such objectives conflict with their self-interests.
However, by positing that superior financial performance is the primary, not
535
universal, objective of firms and treating personal codes as independent
variables, R-A theory expands the kinds of situations beyond those that can be _ _ _ _ _ __
addressed by neoclassical theory.
Consider, for example, the case of distributors of bottled water who could
easily charge double the customary price when a natural disaster shuts down a
community's water supply. Some firms, guided by ethical egoism, i.e. self­
interest maximization, might choose to double the price. Other firms, guided by
"enlightened" self-interest seeking might choose not to double the price because
they believe the long-term, net present value of doubling is less than the
"goodwill value" of nondoubling. However, the personal codes of the managers
of still other firms might result in their resisting the doubling of prices even
though they believe the long-term, net present value of doubling is greater than
the goodwill value of nondoubling. In particular, firms guided by deontological
ethics might resist doubling because they believe it would constitute exploiting
their customers and, hence,. be deontologically wrong. In general (and
inconsistent with agency theory and transaction cost economics), some finns
neither profit maximize nor seek superior financial performance in particular
decision situations because such options would violate (either owner or
nonowner) managers' sense of rightness and wrongness. This sense of
rightness and wrongness results from managers' beliefs concerning their duties
and responsibilities to nonowner stakeholders, i.e. it stems from their personal
moral codes based on deontological ethics.
Finally, GTC argues that efforts to profit maximize may also be thwarted by
ethical code mismatches between managers and their subordinate employees.
Suppose most of a finn's employees have moral codes stressing deontological
ethics and, thus, they· avoid shirking, cheating, stealing, and other
opportunistic behaviors. In such a finn, the costs associated with monitoring
and strong controls would be pure economic waste. If, however, the owner­
manager is an ethical egoist and assumes that the employees are also ethical
egoists (doesn't everyone utility maximize?), then expensive and unnecessary
controls will be instituted. Ironically, then, the assumption of utility
maximization by managers can thwart efforts at profit maximization. Etzioni
(1988, p. 257) puts it this way: "The more people accept the [P-utility
maximization part of the] neoclassical paradigm as a guide for their behavior,
the more their ability to sustain a market economy is undermined".
In summary, superior financial performance is argued to be the best
descriptor of the firm's primary objective because:
• superior rewards flow to owners, managers, and employees of firms that
produce superior rewards;
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536
• superior performance enables the pursuit of other objectives; and
• the pursuit of superior financial performance contributes to explaining
the observed dynamism of market-based economies.
Although firms do seek superior financial performance, they are argued to not
maximize profits because:
• imperfect information makes maximization impossible;
• agency problems associated with ethical egoism will at times thwart
maximization;
• firms guided by deontological ethics will at times choose not to
maximize; and
• ethical code mismatches between (and among) owners, managers, and
subordinate employees will at times prevent maximization.
On general theories
GTC argues that R-A theory is a general theory of competition that
incorporates perfect competition as a special case. Neoclassical critics point out
that the theory is not mathematized and, for them therefore, R-A theory is not
even a theory, let alone a general theory. In contrast, some behaviorally­
oriented scholars question the desirability of any theory that incorporates
perfect competition. For such scholars, neoclassical theory is hopeless and
should be abandoned in toto. I respond to these critiques by first discussing
what it means to claim that one theory incorporates another. I then briefly
review GTCs argument that R-A theory incorporates perfect competition,
before specifically addressing the "equations" and "abandon" queries.
In the philosophy of science, one theory incorporates another when the
general theory can satisfactorily explain the more limited theory's explanatory
and predictive successes (Sellers, 1963; Levy, 1996). The classic example of
incorporation, of course, is that Newtonian theory (which maintains that the
acceleration of two masses increases as they approach each other) incorporates
Galileo's Law of Descent (which assumes that acceleration is constant between
two bodies) and thereby explains all the predictive successes of Galileo's Law.
Simply put, ifd is the distance of a body from the surface of the earth and D is
the radius of the earth, Galileo's Law predicts well for most falling objects
because the ration diD is - as argued in economics by Friedman (1953) to
"close enough" to zero that assuming g to be constant in S = 1/2gt2 is
nonproblematic. Therefore, the foundations of Newtonian theory are such that
they incorporate Galileo's Law as a special case.
GTC argues that R-A theory and its foundations (Table II) represent the
general case of competition and perfect competition and its foundations are a
special case. Therefore, R-A theory incorporates perfect competition, and
explains the explanatory and predictive successes of perfect competition.
Empirical evidence provides a prima facie case for this thesis.
As discussed in Hunt (2000a, pp. 152-6), the massive studies on the diversity
A General
of financial performance among firms, depending on the database used, come
Theory of
to the following conclusion: industry effects account for 4-19 per cent of the
Competition
variance in performance, as measured by return on assets, and individual firm
effects account for 19-55 per cent. The finding that firm effects (the focus of R-A
theory) dominate industry effects (the focus of neoclassical theory) supports
537
viewing the process identified by R-A theory in Figures 1 and 2 as the general
case of the process of competition. Therefore, because a theory is derived from - - - - - - ­
its assumptions, the evidence supports viewing each of R-A theory's
foundational premises in Table II to be either descriptively realistic or, at least,
"close enough" (Friedman, 1953). I now argue that the foundational premises of
perfect competition are, indeed, special cases of R-A theory and, consequently,
R-A theory incorporates perfect competition. I do so by showing when the
latter's foundations are "close enough" to predict. Because the preceding section
focused on premises P3 and P4, I explore here premises Pi, P2, PS, and P7.
How should foundational premises Pi, P2, PS, and P7 in Table II,
concerning demand, information, and resource characteristics, be interpreted?
Note that each assumption could be viewed as an idealized state that anchors
an end-point on a continuum. That is, demand (Pi) could be conceptualized as a
continuum with perfect homogeneity and perfect heterogeneity as idealized
anchor-points. Similar continua could be conceptualized for information and its
cost (P2 and P5) and for the homogeneity-heterogeneity and mobility­
immobility of resources (P7).
However, whereas perfect competition is customarily interpreted in the
idealized, anchor-point manner, in no case is R-A theory to be interpreted as the
anchor-point opposite perfect competition. Rather, each foundational premise
of R-A theory is proposed as the descriptively realistic general Case. Therefore,
intra-industry demand (Pi) is to be interpreted for R-A theory as substantially
heterogeneous. Similarly, information for both firms (P5) and consumers (P2) is
substantially imperfect and costly. Likewise, many, but not all, resources (P6)
are substantially heterogeneous and immobile.
Consider the example of footwear, which is classified by the US Census as
"SIC 314". R-A theory views consumers' tastes and preferences for footwear to
be substantially heterogeneous and constantly changing. Furthermore,
consumers have substantially imperfect information concerning footwear
products that might match their tastes ·and preferences, and obtaining such
information is often costly in terms of both time and money. The implication of
heterogeneity is that few, if any, industry markets exist: there are only market
segments within industries. There is no "market for shoes" (SIC 314), or even
separate markets for women's shoes (SIC 3144) and men's shoes (SIC 3143).
Even though all consumers require footwear and one can readily identify a
group of firms that manufacture shoes, there is no shoe-industry market. That
is, the group of firms that constitute the shoe industry do not collectively face a
single, downward sloping demand curve for such an industry demand curve
would imply homogeneous tastes and preferences.
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For R-A theory, to the extent that demand curves exist at all, they exist at a
level of (dis)aggregation that is too fine to be an "industry". For example, even if
there were a men's walking shoe market, one certainly would not speak of the
men's walking shoe industry. The fact that intra-industry demand is
substantially heterogeneous in most industries (even at the four-digit SIC level)
contributes to R-A theory's ability (and neoclassical theory's inability) to make
538
the correct prediction as to the diversity in business-unit financial performance.
- - - - - - - Likewise, the fact that intra-industry demand is relatively homogeneous ("close
enough") in at least some commodity-type industries, e.g. gold ores (SIC 1041),
contributes to explaining those special cases where perfect competition predicts
well. Therefore, R-A theory's premises Pi, P2, P5 and P7 are the general case;
perfect competition's premises are special cases.
For all the first eight foundational premises shown in Table II, I argue that
R-A theory's foundations are descriptively realistic of the general case of
competition and perfect competition's assumptions are special cases. However,
P9, the issue of competitive dynamics, provides an opportunity to explicate the
argument in detail. Under what set of circumstances will the process of R-A
competition (which is disequilibrium-provoking, with innovation endogenous)
result in perfect competition (which is equilibrium-seeking, with innovation
exogenous)?
Consider the following scenario. First, assume that a set of firms producing
an offering for a particular market segment within an industry has been
competing according to R-A theory. Therefore, because of resource
heterogeneity (say, different levels of a key competence); the firms are
distributed throughout the nine marketplace positions in Figure 2. Some firms,
because of their comparative advantage in resources, are enjoying superior
returns; others, because of their comparative disadvantage in resources, have
inferior returns; and still others, because of their parity resources, have parity
returns (see Figure 1).
Next assume that, through time, both disadvantaged and parity firms
gradually learn how the advantaged firms are producing their offerings more
efficiently and/or effectively and successfully imitate the advantaged firms by
acquiring or developing the requisite resources. For example, assume that they
gradually develop competences equivalent to the advantaged firms. Then
assume that, even though all firms seek superior financial performance, no firm
finds it possible to acquire, develop, or create new resources (e.g. developing a
new competence) that will enable it to produce a market offering more
efficiently or effectively than any other firm. That is, for some reason or set of
reasons, all competition-induced innovation stops, both proactive and reactive.
Consequently, all competition-induced technological change stops. Under these
economic conditions, then, the resources of all firms serving this market
segment become relatively homogeneous and there will be parity resources
producing parity offerings.
Next assume that the tastes and preferences of consumers in all other market
segments served by the firms in this industry shift toward the original
segment. Industry consumer demand will then become relatively
homogeneous. Suppose further that consumers' tastes and preferences remain
stable throughout a significant period of time and that consumers become very
knowledgeable about the relative homogeneity of firms' offerings. There will
then be parity resources producing parity offerings, which results in all firms
having parity marketplace positions (cell 5 in Figure 2).
Next assume that firms have accurate information about competitive
conditions and there are no institutional restraints preventing them from
producing their market offerings in the profit-maximizing quantity.
Under these economic circumstances, the industry experiences no
endogenous technological change, firms become price-takers, and a static
equilibrium theory of competition, such as perfect competition, applies.
That is, there will be parity resources producing parity offerings,
which results in parity marketplace positions and parity performance (see
Figure 1). The industry has now become a candidate for "industry effects"
to dominate "firm effects" in empirical studies, for collusion and barriers to
entry to become viable explanations for any industry-wide, superior
financial performance, and, in general, for industry-level theoretical
analyses to be appropriate.
Next assume that the preceding process occurs in every industry in an entire
economy. Then, if this set of economic circumstances persists through time, all
competition-induced technological change ceases, all endogenous technological
progress stops, all endogenous growth ceases, and a long-run, general
equilibrium theory applies (such as Walrasian general equilibrium). In such an
economy, growth comes only from exogenous sources, including those sources
(e.g. government R&D or a state planning board) that 'might develop
innovations that result in exogenous technological progress, as in neoclassical
growth theory (see Hunt 2000a, pp. 179-83).
Note that the preceding analysis began with the process of R-A competition
for a market segment and sketches the special economic circumstances that
must prevail for the competitive process to result in a static-equilibrium
situation in an industry. Among other conditions, it showed that a very
important circumstance is that all endogenous innovation must stop (or be
stopped). Such a stoppage might come as a result of collusion, complacency,
institutional restrictions, governmental fiat, or lack of entrepreneurial
competence. The analysis then sketched the special circumstances for a long­
run general equilibrium to develop and, again, it showed that all endogenous
technological progress in all industries, hence, all endogenous economic growth
in an economy, must cease. Therefore, the statics of perfect competition, both
partial equilibrium and general equilibrium, may be viewed as a special case of
the dynamics of R-A theory. R-A theory relates to perfect competition in the
same way that Newtonian mechanics relates to Galileo's Law: the former
incorporates the latter.
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On the "equations" and "abandon" arguments
Returning to the neoclassical criticism that R-A theory is not a system of
equations. The history of economics tells us that it was the Austrian Carl
Menger (1840-1921), the Englishman William Stanley Jevons (1835-1882), and
35,5/6
the Frenchman Leon Walras (1834-1910) who initiated the "marginalist
revolution" in economics in the 1870s (Kuhn, 1970). Rejecting the view that
540
objective factors, such as the quantity of labor, determined a commodity's
- - - - - - - value, Menger, Jevons, and Walras, each working independently, articulated a
subjectivist theory of value. In this view, the key to understanding the
exchange value of a commodity was the subjective increment to utility
attributed by the consumer to the last unit added to or subtracted from the
consumer's stock of the commodity. This incremental or marginal utility,
which they argued declined monotonically with each additional unit, enabled
them to resolve Adam Smith's paradox that water is very useful but has low
exchange value, whereas diamonds have little use value but high exchange
value.
The concept of marginal utility enabled Jevons and Walras to import
differential calculus into economics. For them, utility was a continuous function
and marginal utility was its first derivative, i.e. MUx = dU/ dx. The current
practice of expressing key economics' constructs in mathematical equations
that can then be solved for their maxima and minima using the calculus began
with the marginal utility construct developed in the 1870s for analyzing
demand. For the next seven decades the mathematization of all areas
comprising the neoclassical research tradition proceeded steadily.
After the publication of Samuelson's (1947) Foundations of Economic
Analysis, the mathematization of neoclassical economics accelerated; by 1990 it
was complete (Debreu, 1990). The prestigious John Bates Clark medal was first
awarded by the American Economics Association in 1947. Of the first 21
awards, 20 went to Fellows of the Econometric Society. Similarly, of the 30
Nobel awards for economics made between 1969 and 1990, 25 went to ES
Fellows (Debreu, 1990). Not only had equation-solving become the preferred
language of discourse in the journals of mainstream economics by 1990, but
also "economic theory" and "mathematical equations" had become
synonymous.
However, the equations of perfect competition must receive a substantive,
nonmathematical interpretation in order for empirical testing and prediction to
occur, and predictive adequacy is the epistemology of neoclassical economics
(Friedman, 1953). Therefore, though R-A theory is not a system of equations, it
shows when the system of equations constituting perfect competition is "close
enough" to predict well. In doing so, R-A theory preserves the cumulativity of
economic science. For example, the equations of the endogenous growth models
of Romer (1994), Stokey (1991), and Young (1993) require a theory of
competition such as R-A theory (Hunt, 1997b). In short, neoclassical economic
theory needs a substantive, process theory of competition; GTC fits the
requirements.
In contrast, the argument that neoclassical, perfect competition theory
should be abandoned stems from its explanatory and predictive failures. For
example, some philosophers of science (e.g. Rosenberg, 1992) who specialize in
economics characterize the neoclassical research program as an empirical
failure. Similarly, many economists are keenly disappointed with the tradition's
record as to predictive accuracy. As a case in point, in his 1970 presidential
address to the American Economic Association, Nobel laureate Wassily
Leontief (1970, p. 275) lamented: "In no other field of empirical enquiry has so
massive and sophisticated a statistical machinery been used with such
indifferent results". And 12 years later he concluded:
Year after year economic theorists continue to produce scores of mathematical models and to
explore in great detail their formal properties; and the econometricians fit algebraic functions
of all possible shapes to essentially the same sets of data without being able to advance, in
any perceptible way, a systematic understanding of the structure and operations of a real
economy (Leontief, 1982, p. xi),
I grant that empirical failures abound in perfect competition theory. I disagree, however, that the empirical failures call for abandonment, for the theory's scorecard has many empirical successes as welL Furthermore, all research traditions in the social sciences have empirical failures aplenty. Rather than abandonment, I argue that perfect competition should be retained for predictive purposes in those circumstances in which it should be "close enough". What should be abandoned, for the reasons developed in GTC, is the use of perfect competition as a normative theory to guide public policy. An invitation Ever since the time of Plato, the Western philosophical tradition has stressed the importance of "critical discussion" in separating knowledge from opinion. Accordingly, I extend a cordial invitation to all scholars, irrespective of discipline, to subject GTC to critical discussion. First, GTC (Hunt, 2000a) makes numerous claims to knowledge, including the claim that resource­
advantage theory: • explicates the view that competition is a process of knowledge discovery
(pp. 29-30 and 145-7);
• expands the concept of capital (pp. 186-9)
• predicts correctly that technological progress dominates the KIL (i.e.
capital/labor) ratio in economic growth;
• predicts correctly that increases in economic growth cause increases in
investment (pp.194-8);
• predicts correctly that most of the technological progress that drives
economic growth stems from actions of profit/driven firms (p. 199);
• provides a theoretical foundation for why formal institutions promoting
property rights and economic freedom also promote economic growth
(pp. 215-27); and
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• provides a theoretical foundation for why informal institutions
promoting social trust also promote economic growth (pp. 235-38).
It would seem that all of these claims, among others in GTC, warrant critical
examination.
A second form of critical discussion would be testing empirically the
implications of R-A theory. As to research methods appropriate for such
542
- - - - - - - testing, readers may wish to consult the numerous studies in the management
and marketing literatures testing the resource-based view of the firm. However,
a caution here is in order. R-A theory adopts a resource-based view of the firm.
There is no such thing as the resource-based view of the firm. In particular,
many versions of the resource-based view specifically adopt a neoclassical,
static equilibrium approach. Therefore, the research methods employed in all
tests of the resource-based view would be not appropriate for testing R-A
theory.
A third form of critical discussion would focus on the premises of R-A
theory. As discussed previously, GTC maintains that the premises of R-A
theory (Table II) constitute the descriptively realistic, general case of
competition. Indeed, R-A theory adopts the philosophical position of scientific
realism. Therefore, each premise of the theory is a candidate for critical
discussion. If a premise is found lacking, it should be replaced with a more
descriptively realistic version.
A fourth form of critical evaluation would be to compare the merits of R-A
theory with other theories of competition. GTC contrasts R-A theory with
neoclassical, perfect competition theory. Many critics at conferences argue that
there are theories of competition other than perfect competition against which
R-A theory should be compared. However, to date these critics have spoken of
"other theories of competition" in only the most general sense. If there are other
theories of competition that should be compared with R-A theory, what are the
foundational premises and structures of these theories? Specifically, how do the
premises of these theories differ from those in Table II? How do the structures
of these theories differ from those articulated in Figures I and II? Note that it is
only by comparing rival structures and foundational premises that one can
clearly evaluate how and why theories are consistent or inconsistent, saying
different things or saying the same things differently, genuinely rival or
actually complementary.
Finally, critical discussion might focus on developing the public policy
implications of resource-advantage theory. GTC argues that public policy
should promote vigorous R-A competition when the goals of public policy are
wealth creation, productivity, and economic growth. What if the goal of an
equitable distribution of income is adopted? Are equity and economic growth
by means of R-A competition in conflict? If so, what definition of "equitable
distribution" is- implied? These questions and many others remain open to
critical discussion. I invite all scholars to participate in the debate over GTC.
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