On the Heterogeneity of Firms

An important issue in corporate strategy is to explain persistent differences in conduct and performance among close competitors within an industry. While IO economists generally seek technology and market-based explanations, firm theorists and business policy scholars rather look for historical and organizational reasons. The paper first summarizes recent findings along these two approaches. It then studies sources of persistent differences between two firms competing à la Cournot on two identical markets. In this context both types of explanations are found to matter. We show that the firms' respective capabilities (i.e. the parameters that determine their cost of producing the two goods) would diverge only if some difference in the firms' respective initial capabilities exists or there is an appropriate combination of organizational inertia (the cost for updating current capabilities) and market conditions.