Phebo Wibbens, INSEAD
Abstract: This paper introduces a formal model that highlights the importance of competitive amplification in creating sustained performance heterogeneity. The model predicts that amplification and the resulting heterogeneity are largest in markets with resources that are scale-free, carry high sunk cost, depreciate rapidly, and/or exhibit strong time-compression diseconomies. In markets with resources that have such amplifying characteristics, an advantaged firm has a stronger incentive to invest than a follower, leading to the emergence of high heterogeneity and potentially even a monopoly. In the absence of amplifying resource characteristics, performance differences are attenuated, leading to relatively low heterogeneity. The Markov perfect equilibrium (MPE) model in this paper can be extended for further research on resource evolution under uncertainty.