Birger Wernerfelt

Diversification, Ricardian rents, and Tobin's q

According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobins q as the measure of rents, is consistent with this theory.

Umbrella branding as a signal of new product quality: an example of signalling by posting a bond

I present a signalling model in which a multiproduct firm can use its reputation as a bond for quality by using a brand name for an established product when it introduces a new experience good. As out-of-equilibrium beliefs are specified, a false signal may be taken to imply that both the established and the new product are of low quality. In contrast, the absence of a signal leaves open the possibility that one of the two products is of high quality. Hence, the signal can be credible without excessive sunk costs, as long as the bond posted is sufficiently large.

From Critical Resources to Corporate Strategy

Suppose a new high growth segment opens up in your industry. Should you enter that segment? Many other firms are likely to enter as well. Will the returns justify the costs? If too many firms enter, and commit high levels of funding, your return on investment will be mediocre at best. This would be a disappointing experience, but it is one many companies have had in races for market share and technological advantage. Of course, this does not mean that you should not chase such opportunities. If you fail to do so, you might do even worse. It does, however, imply the following: on an even playing field, against well managed competitors, you cannot expect superior performance. You need to look for tilted playing fields, areas where you have a competitive advantage. Where do you have an advantage? You have the advantage in markets where your resources are superior to those of the competition. In such a game you can achieve a strong market position at a lower cost than your competitors. The first step is to identify your resources. The second step involves deciding where to compete. Only then do you worry about how to compete. This shifts the focus of strategic analysis from the industry to the company itself [1]. Strategy formulation consists in the identification, deployment and development of resources. What principles govern this process in wellmanaged companies?

On the Nature and Scope of the Firm: An Adjustment-Cost Theory

The author compares the alternative game forms for situations where a buyer needs a sequence of human asset services. The hierarchy is defined as a game form in which the parties engage in once-and-for-all wage negotiation, the boss describes desired services sequentially, and either party may terminate the relationship at will. If many diverse and frequent adjustments are needed, this involves lower adjustment costs than any alternative game form. The price list game form is better when the list of possible adjustments is small and the negotiation-as-needed game form is better when adjustments are needed infrequently. An empirical test supports the theory. Copyright 1997 by University of Chicago Press.

The Role of Inference in Context Effects: Inferring What You Want from What Is Available

It has recently been suggested that a number of experimental findings of context effects in choice settings can be explained by the ability of subjects to draw choice-relevant inferences from the stimuli. We aim to measure the importance of this explanation. To do so, inferences are assessed in an experiment using the basic context-effect design, supplemented by direct measures of inferred locations of available products on the price-quality Hotelling line. We use these measures to estimate a predicted context effect due to inference alone. For our stimuli, we find that the inference effect accounts for two-thirds of the average magnitude of the context effect and for about one-half of the cross-category context-effect variance. Copyright 1997 by the University of Chicago.

Brand loyalty and user skills

Abstract The paper develops the idea that brand loyalty is a rational thing for a consumer to have. The reason is that a consumers experience with a brand creates user skills which make that brand more useful to the consumer than other brands, even though these, given the same experience, would be equally useful. In a brand switching model this implies that the consumer will switch brands only if there is an adequately large price differential and that the required price differential increases with user skills. The theory is related to standard search theory and it is shown that user skills and search costs have similar effects in the sense that either can support price dispersion in a market.

Advertising Content When Brand Choice Is a Signal

This article gives a formal rationale for image advertising and branding of homogeneous products that are consumed in public. The idea is that consumers can use brand choice to coordinate behavior and send meaningful social signals. The article distinguishes between variety signals and quality signals, and analyzes the competitive implications. Copyright 1990 by the University of Chicago.

The Use of Resources in Resource Acquisition

The author considers the processes through which a firm can acquire resources and argues that its current stock of resources create asymmetries in competition for new resources. Two simple models illustrate how this can work through linkages on the demand and/or cost side. The normative implication is that firms should expand their resource portfolios by building on their existing resources; different firms will then acquire different new resources, and small initial heterogeneities will amplify over time.

Product Development Resources and the Scope of the Firm

This article examines the relationship between a firms strength in product development and its optimal scope. Firms with product development strength have two options: They can leverage it in horizontally related markets, and they can reach into the supply chain to take full advantage of it. The question is how this should be done. One possibility is for the firm to expand its scope, and another is to manage the linkage through contracts. On the basis of the adjustment cost theory of the firm, the author argues that the former solution is more appropriate when product development is fast-paced. This study tests the argument in a sample of several thousand firms and reports four tests. For both types of expansion, the author examines the incidence and the productivity of increased scope. The author uses several measures and finds results that are consistent with the theory.

Tacit collusion in differentiated cournot games

Abstract In a simple oligopoly with quantity setting firms, we analyze the conditions under which more product differentiation makes tacit collusion easier. It is found that the net effect can go either way.