An economic model of strategic entrepreneurship

Research Summary: How do new entrants create and capture value in established industries? Starting from the foundations of neoclassical economics, we model entrepreneurial entry and competition as occurring simultaneously in production technology space and product attribute space. Our model's central feature is to disaggregate entrepreneurial rents into four components: arbitrage, innovation, organization, and uncertainty-bearing. This permits us to model the nature of value creation from a common analytical platform, and to measure value capture as a set of distinct rent streams available to multiple stakeholders over time. Managerial Summary: Although there is broad consensus that the essence of entrepreneurship is the creation and capture of new value, both scholars and practitioners have struggled to connect this basic exhortation to the entrepreneurial process. This paper argues that returns to entrepreneurial action can be generated through four main mechanisms: innovation, uncertainty-bearing, new business models, or inter-industry arbitrage-either uniquely, or in combination. Examining these mechanisms for value creation together reveals implications for how best to organize and manage the entrepreneurial process so that that returns to entrepreneurial action can be appropriated equitably.