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Finally, with dynamic competition, we draw on the Schumpeterian view of competitive advantage, reviewing and highlighting the more recent stream of research on actions and reactions, and Nelson and Winter’s view of evolutionary economics. Chapter 3 explores how a firm can achieve a competitive advantage over its rivals by understanding its relative market position—the first step to understanding the action alternatives available to the firm. Since a firm’s relative market position involves understanding the industry structure and dynamics in which a firm competes, we examine the most popular frameworks in performing an industry analysis, including Porter’s Five Forces and strategic group analyses, which help firms identify the best competitive positions and profit opportunities in an industry.

The Chamberlin model gives rise to a substantial role for firm strategy. Patents, trademarks, customer service, reputation, and the like can all be the source of competitive advantage; as will be discussed in the following chapter, these sources of differentiation can all be considered resources in the resource-based view of the firm. Models of Monopoly or Dominant Firm Another fundamental model within neoclassical economics is the model of a monopolist. In this instance, we have one firm in the market.

If prices initially exceed marginal cost, so that firms make a positive economic profit, entry occurs, which then drives down prices. 2 There is a minimal role for firm strategy within this perspective, other than to avoid, if possible, such ‘‘unattractive’’ markets. However, the model of perfect competition does drive home important lessons on the strength of competitive forces in a free market economy in eroding excess profits and driving out inefficient firms, particularly in the absence of product differentiation or entry barriers.

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