Durable Dominance.

Abstract

I advance an explanation for durable dominance—dominants’ enduring control of vastly disproportionate shares of contested resources in the face of mass entrepreneurial entry and increased competitive parity. I argue that increased, more potent competitive entry and more level rules of competition can benefit dominants. More and stronger new entrants disproportionately disadvantage non-dominants compared to dominants, and weaken near-dominants’ ability to challenge dominants. Durable dominance is observed in many settings, for example, in the increased gap between the wealthiest in the U.S. and everyone else, and in industries where dominant companies maintain their dominance in open, competitive markets. I test the predictions of this theory in two settings. First, I investigate the implications of this theory with thirty years of data on competition among U.S. mutual funds. As predicted by the theory, the effects of increased competitive entry on incumbents were nonlinear: deleterious for incumbent funds on average, but beneficial for dominant funds. New entry of similar competitors depressed future annual flows of investor money into 96.5% of mutual funds, but the top 1.3% of mutual funds gained on average almost $70 million of assets under management from the entry of a similar competitor. Increased competitive entry also increased dominant funds’ probability of remaining dominant for longer than three years. Second, I examine the process of board seat accumulation for directors on the boards of S&P1500 companies. Those with many board seats (dominant directors) compared to those with only one were about twice as likely to gain another seat in 2000, but no more likely by 2010. The theory predicts that such a leveled playing field should prevent non-dominants from rising to dominance, and the data support this prediction. A Monte Carlo simulation supports the causal relationship between the changed micro-dynamics of hiring and the observed non-appearance of new dominant directors. The proposed theory suggests policy implications for dominants, non-dominants, and policy-makers. I close by suggesting future investigations that could test the general applicability of the theory. I argue that the study of most-often-true “social laws” is a useful complement to the current focus on social mechanisms in organization theory.