Endogenous Heterogeneity in Strategic Models: Symmetry-breaking via Strategic Substitutes and Nonconcavities

apply Theorem 3.3 and Amir and Wooders conclude that player 1 prefers the
equilibrium in ∆U (for details, see Amir and Wooders, 2000).

This model provides a good opportunity for a typical economic interpre-
tation of strategic endogenous heterogeneity in a context that is of particular
interest to business strategy scholars. Indeed that field typically attaches a great
deal of importance to the innovation process and to its central role in dynamic
competition. The key driving force behind asymmetric equilibrium outcomes
here is the one-way nature of the spillover process. A firm will always react
by performing either less R&D than its rival knowing that it may free ride on
the difference in R&D levels, or, in case the rival’s R&D is simply too low, by
overtaking it. In this vision, firms will endogenously settle into R&D innova-
tor and imitator roles simply as a reflection of the nature of the R&D spillover
process. This critical difference arises as a consequence of strategic thinking
in a fully interactive setting: though facing equal and known opportunities in
all respects, firms emerge as fundamentally different in all possible equilibria
of a robust and general model. In strategic settings, there may simply be no
single ”best choice” (to paraphrase Nelson, 1991) for all ex ante identical firms
facing the same available choices, simply because one firm’s choice has a direct
influence on what becomes best for its rivals.

This difference in one key component of firms’ overall strategies will then
be a causal factor, through natural complementarity-reinforcing developments,
for heterogeneity in other aspects of firms’ strategies, including in particular
firm size and organization (see Amir and Wooders, 1999 for details). This
perspective stands in sharp contrast to the explanation for inter-firm differences
characterized by idiosyncratic groping behavior on the part of firms and weak
interaction amongst them in a world of high uncertainty and complexity, as
often envisioned in the strategy literature.

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