Article | Strategic Management Journal | Summer 1988

Beyond the Reach of the Invisible Hand: Impediments to Economic Activity, Market Failures, and Profitability

by Dennis Yao

Abstract

In this paper it is argued that failures of the competitive market are necessary conditions for supranormal profitability. Three fundamental causes of these market failures-production economies and sunk costs, transactions costs, and imperfect information-are developed from the theory of competitive markets and discussed in terms of their impact on profitability. The identification of these 'impediments to economic activity' is useful for determining successful strategies to exploit market failures.

Keywords: Economics; Markets; Failure; Profit; Cost; Information; Market Transactions; Competition; Strategy; Production;

Citation:

Yao, Dennis. "Beyond the Reach of the Invisible Hand: Impediments to Economic Activity, Market Failures, and Profitability." Strategic Management Journal 9 (Summer 1988): 59–70. (Harvard users click here for full text.)