Strategic Management Journal, Vol. zyx 14, 47-58 (1993) z INFORMATION, MARKET IMPERFECTIONS AND STRATEGY zyxw L RICHARD M. CYERT, PRAVEEN KUMAR, and JEFFREY R. WILLIAMS Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania, U.S.A. zyxwvu c z In thk paper we argue that the organization’s search for market imperfections rejlects the information dhpersion in the economy. We describe, within a Bayesian framework, the relative importance of and the mechankm by which externally- and internally-based informational rents arise endogenously. We argue that, rather than viewing the strategic planning process zyxwvu as one where the firm must pursue only one source of information, search should be viewed as evolving within a dynamically related system; progressing from externally-based to internally-based sources of rent as markets evolve. zyx INTRODUCTION A zyxwvutsrq firm’s management is always on a search to find ways to make the firm unique. If the firm operated under the conditions specified for a perfectly Competitive model, then there would be no use for strategy. In perfect competition, the product is a commodity since each firm has an identical product in every possible dimension. There is no strategy that will allow the firm to gain an advantage over its competitors. Even collusion as a strategy is ruled out since there is a large number of firms and each zyxwv firm has a small impact on price. Thus, many economists have been led to undervalue the importance of strategy to the firm. However, when we move to the real world, we see that firms always try to escape from competitive conditions and strategy becomes more important for the firm. If the product tends toward being a commodity, the firm zyxwvu will search for a comparative advantage through credit Key words: Economics, strategic management, infor- mation, sustainability terms, quickness of delivery, reliability of the supply, special services to tailor make products, and other similar factors.’ The magnitude of the net profit figure; i.e., renfs is then a direct function of the success the firm has in gaining a comparative advantage through these approaches. Indeed, if the firm can produce a product that is the only one of its kind (i.e., achieve a local monopoly), then the constraints on pricing are loosened and the ability to make larger profits is increased. Thus, the search for market niches or other ways to escape from a competitive market has long been a major part of strategic planning. The length of the time that the firm can have a local monopoly from the niche depends on the sustainability* of that niche-in terms of the stability of consumer preferences, and the firm’s ability to effectively blockade Broadly speaking, the firm will emphasize nonprice dimen- sions (Scitovsky, 1991) to enhance its market share -d profits. This argument is developed in greater detail in Cyert, Kumar and Williams (1993). *The issue of sustainability of comparative advantage (or sources of rents) has been directly examined by Williams (1992). CCC 0143-2095/93/100047-12 @ 1993 by John Wiley & Sons, Ltd.