Competing with Theories: Using Awareness and Confidence to secure Resources and Rents

Timo Ehrig and Todd Zenger

No 2024-078, Working Papers TIMES² from ULB -- Universite Libre de Bruxelles

Abstract: An assumption of factor market efficiency is often used to grant primacy to firms’ existing unique and valuable resources as the source of economic rents. But this assumption is difficult to reconcile with observed market outcomes. For instance, five of the six companies with the highest global market capitalization in 2022 were upstarts in their industries with few resources at their origins. More surprising, three of these entrants were assisted by incumbents with vastly superior resources in assembling the resources they required. In this paper we explore how entrants compete with theories to secure resources from incumbents and capture rents. We introduce a modeling approach in which theories with causal logic generate awareness of valuable potential future states and shape the beliefs about payoffs and probabilities associated with these states. We combine work in the theory-based view and value capture theory to distinguish among three distinct sources of economic rents that are potentially available to entrants: awareness rents, confidence rents, and resource rents. We explore the circumstances under which these three types of rents are available. By exploring the role of theories and awareness in value creation and capture, our paper seeks to deepen our understanding of how entrants both attract resources and secure rents

Pages: 17 p.
Date: 2024-09
New Economics Papers: this item is included in nep-hme
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