My argument is that the market imperfections that lead to the firm achieving sustainable competitive advantage (SCA) are sufficient market imperfections for the firm to exist. I DID NOT SAY that the market imperfections that are sufficient for the firm to exist are sufficient for SCA !! Thus, your example of Knightian uncertainty being sufficient to explain the existence of the firm but not SCA does not refute the Mahoney conjecture.

In terms of your other example that capital heterogeneity is sufficient to explain supra-normal FACTOR returns, but not necessarily the firm. Of course that is correct!! However, the Mahoney conjecture is that the market imperfections that result in supra-normal returns FOR THE FIRM (measured by TOBIN’S Q greater than one) will be sufficient market frictions for the firm to exist.

I still (tentatively) believe that the Mahoney conjecture is a tautotolgy.

I tend to use “market imperfection” and “market friction” interchangeably — your example suggests that for precision of language (Semantics IN Economics) I should not.

Also, the Mahoney conjecture is that if the FIRM achieves economic rents then the market imperfections that lead to economic rents for the FIRM will be sufficient market frictions for the firm to exist. For the empirically minded, my conjecture is that a firm with a long-run Tobin’s Q greater than 1 (due to some market imperfections) will be sufficient market imperfections for the firm to exist. If you have an example to refute this conjecture, please provide it.

As a coincidence, I reviewed a paper yesterday for SMJ that referenced the Silverman 1999 paper and I did note (much to my surprise !!) that a similar conjecture was made — albeit more in terms of asset specificity. Thus, even if the Mahoney conjecture does not hold (in terms of ALL market imperfections), the Silverman conjecture still might hold. And, of course, if you refute the Silverman conjecture then you have sleighed the little Mahoney beast conjecture :-)

My thinking starts with the two Fundamental Welfare Theorems of Economics, which leads to zero economic profit in equilibrium. Following Kenneth Arrow, I view a market friction as an impediment to the Pareto optimal competitive market equilibrium. Thus, I consider the claim that there must be some market friction to lead to sustainable competitive advantage to be a tautology. That is, some premise of the Fundamental Welfare theorems must be relaxed for positive economic profit.

In fact, I strongly suspect that my conjecture is also a tautology. If someone provides a model where the firm has sustainable competitive advantage due to market frictions (in RBV), those will be a sufficient set of (transaction cost) market frictions for the firm to exist (in transaction costs theory).

That is, if the firm’s long-run Tobin’s Q is greater than 1, then the firm will continue to exist (not as catchy as the Descartes one that “I generatate rents therefore I exist.”)

What do you and Peter think about this line of reasoning? — it is one of the few original ideas that have left my brain on to the printed page, and it is still a conjecture — although Mike Peng in JIBS is more confident in calling it the “Mahoney theorem.”

Teece (JEBO 1982) extensively deals with the first part of your question concerning why a diversifed multi-product firm may be superior to a contractual relationship. Thus, to directly answer your question, transactions costs are a substantial part of the story.

Thus, economies of scope that are achieved by complementary assets can be achieved by a contract if there are “large numbers” of both assets.

Economies of scope that are acheived by co-specialzed assets may require internalization due to the inherent bilateral monopoly problem.

Note that my original comment was that co-specialized assets can be a sufficient condition for the firm achieving economic rents — since there are transaction costs (market) frictions.

The Mahoney conjecture (as Makadok calls it in an SMJ article) is that the market frictions that are sufficient to explain the firm achieving economic rents (in RBV) will be sufficient conditions for the firm to exist (in transacton costs theory). (see my Journal of Management paper in 2001):

If Descartes was a firm he would have said: “I generate rents, therefore I exist.”

One of the more fundamental concepts in the field of Strategic Management that tends to be underemphasized in the field of Economics is that of “co-specialized” assets (Teece, 1986).

Consider the example of an Acquisition. If there are economies of scope savings (Baumol, Panzar and Willig, 1982) AND they are co-specialized assets then the acquiring firm can achieve economic rents in this bilateral monopoly scenario.

Thus, besides “asymmetric information and luck” (Barney 1986), an important third category is co-specialized assets, which enable us to overcome the efficient market result of zero economic rents for the Acquirer.

My premise is that co-specialized assets are more common than the typical industrial organization economists or corporate finance Professor believes. And my conjecture is that co-specialized assets are more likely with diversification that is related — however measured — than unrelated.

If this premise and conjecture are correct, it would be a sufficent resource-based theory explanation of the superior performance of related relative to unrelated diversificaton, which complements Montgomery and Wernerfelt (1988).

(I also add parenthetically that Chandler (1977) THE VISIBLE HAND, and Chandler (1990) SCALE AND SCOPE can be read to support the importance of co-specialized assets.)