ToS 4.2 – Schumpeterian View II: Expectations and Creative Destruction
ToS 4.2 – Schumpeterian View II:
Expectations and Creative Destruction
Oct 6, 2026 · @Nikki
Where meeting 4.2 fits
Meeting 4.2 asks why some firms (often entrants) handle uncertainty and creative
destruction better than others, and answers with two mechanisms: asymmetric
expectations in factor markets (Barney, 1986) and the value network that holds
incumbents captive (Christensen & Rosenbloom, 1995). Both relax the rationality
assumption of perfect competition: decision makers are boundedly rational and hold
subjective, different expectations.
It is the second Schumpeterian meeting (block 3, dynamic views). Meeting 4.1 introduced
uncertainty and Schumpeterian profit; 4.2 asks how decision making under that
uncertainty works and why incumbents fail.
Page 1 of 19
,ToS 4.2 – Schumpeterian View II: Expectations and Creative Destruction
Source Type What it contributes
Barney (1986), Strategic Reading 17 Profit depends on what
Factor Markets: resources cost; only
Expectations, Luck, and asymmetric expectations (or
Business Strategy luck) let a firm buy resources
below their future value
Christensen & Rosenbloom Reading 18 (your file is Incumbents fail because their
(1995), Explaining the named "1993"; the journal value network shapes what
Attacker's Advantage version is Research Policy they see as valuable, not
1995) because they lack technical
skill
Lecture 8 notes + "Rent vs Lecture Profit vs rent table; sources of
Profit" slides entrepreneurial profit (cf.
Barney 1986)
"Why incumbents often fail" Lecture Four critical failure factors:
slides supply side, demand side,
architectural innovation,
managerial cognition
Case 3G/UMTS auctions Case Factor-market bidding under
(The Economist, 2004) uncertainty, winner's curse
Key concepts (study guide, meeting 4.2): bounded rationality · subjective expectations ·
disruptive innovation · architectural innovation · demand- and supply-side reasons for
incumbent failure · value network.
Study question 8: What do the articles for this week (meetings 4.1 and 4.2) have to say
about the role of human cognition and decision making in explaining the success and
failure of firms?
Note: the 2020-21 slide files labelled "meeting 4.2" (Knowledge and capabilities, Core
competencies) belong to meeting 5.1 in the 2026-27 outline, so they are not part of this
summary.
Rent versus profit
Rent and profit are both above-normal returns, but they come from different
mechanisms: rent is a static equilibrium return to an individual scarce resource, while
(pure) profit is a temporary disequilibrium return to a new combination of resources,
made possible by uncertainty. Stoelhorst stresses that Barney (1986) explains profits,
while Barney (1991) explains rents.
Page 2 of 19
, ToS 4.2 – Schumpeterian View II: Expectations and Creative Destruction
Profit (Schumpeterian / Rent (Ricardian / efficiency)
entrepreneurial / Knightian)
Concerns Value creation Value appropriation
Accrues to A bundle (configuration) of An individual resource
resources
Logic Dynamic, disequilibrium Static, equilibrium
Driven by Uncertainty Resource heterogeneity (scarce,
fixed supply)
Duration Temporary: competed or Persists as long as the resource
bargained away in product and stays scarce and heterogeneous
factor markets
Key author in this Barney 1986, Schumpeter, Ricardo, Barney 1991, Peteraf 1993
course Austrians
The Ricardian land example (lecture slides)
The lecture uses a numerical story to show how profit arises and then turns into rent.
1. Situation 1 (demand = 200). One fertile plot (landowner A) produces 200 units. Costs:
labour 25, capital 50, land rent 50 (the landowner's opportunity cost), entrepreneur 25
(his opportunity cost) = 150. Price = = 0.75. Everyone just earns their
opportunity cost: zero economic profit.
2. Situation 2 (demand rises to 300). A less fertile plot B must be farmed, producing only
100 units at the same cost of 150. Price is set by the marginal firm: P = MR = MC = 150 /
100 = 1.50.
3. Who gets the gain on plot 1? Revenue on plot 1 is now 200 × 1.50 = 300. Contracted
payments stay: labour 25, capital 50, rent 50. The entrepreneur, as residual claimant,
gets 300 − 125 = 175: his 25 opportunity cost + 150 entrepreneurial profit.
4. When contracts expire, landowner A is in a competitive bargaining position and
appropriates the 150 as a Ricardian (efficiency) rent. Profit has become rent.
5. Why could the entrepreneur get such a good contract? Because of uncertainty. Had
the demand rise been generally anticipated, the landowner would have priced the land
higher from the start.
Principle (lecture numbering, Principle 4 / study guide table Principle 5): given
uncertainty, firms can earn an economic profit by bringing new combinations to market,
but uncertainty by itself only allows a temporary profit.
Page 3 of 19
ToS 4.2 – Schumpeterian View II:
Expectations and Creative Destruction
Oct 6, 2026 · @Nikki
Where meeting 4.2 fits
Meeting 4.2 asks why some firms (often entrants) handle uncertainty and creative
destruction better than others, and answers with two mechanisms: asymmetric
expectations in factor markets (Barney, 1986) and the value network that holds
incumbents captive (Christensen & Rosenbloom, 1995). Both relax the rationality
assumption of perfect competition: decision makers are boundedly rational and hold
subjective, different expectations.
It is the second Schumpeterian meeting (block 3, dynamic views). Meeting 4.1 introduced
uncertainty and Schumpeterian profit; 4.2 asks how decision making under that
uncertainty works and why incumbents fail.
Page 1 of 19
,ToS 4.2 – Schumpeterian View II: Expectations and Creative Destruction
Source Type What it contributes
Barney (1986), Strategic Reading 17 Profit depends on what
Factor Markets: resources cost; only
Expectations, Luck, and asymmetric expectations (or
Business Strategy luck) let a firm buy resources
below their future value
Christensen & Rosenbloom Reading 18 (your file is Incumbents fail because their
(1995), Explaining the named "1993"; the journal value network shapes what
Attacker's Advantage version is Research Policy they see as valuable, not
1995) because they lack technical
skill
Lecture 8 notes + "Rent vs Lecture Profit vs rent table; sources of
Profit" slides entrepreneurial profit (cf.
Barney 1986)
"Why incumbents often fail" Lecture Four critical failure factors:
slides supply side, demand side,
architectural innovation,
managerial cognition
Case 3G/UMTS auctions Case Factor-market bidding under
(The Economist, 2004) uncertainty, winner's curse
Key concepts (study guide, meeting 4.2): bounded rationality · subjective expectations ·
disruptive innovation · architectural innovation · demand- and supply-side reasons for
incumbent failure · value network.
Study question 8: What do the articles for this week (meetings 4.1 and 4.2) have to say
about the role of human cognition and decision making in explaining the success and
failure of firms?
Note: the 2020-21 slide files labelled "meeting 4.2" (Knowledge and capabilities, Core
competencies) belong to meeting 5.1 in the 2026-27 outline, so they are not part of this
summary.
Rent versus profit
Rent and profit are both above-normal returns, but they come from different
mechanisms: rent is a static equilibrium return to an individual scarce resource, while
(pure) profit is a temporary disequilibrium return to a new combination of resources,
made possible by uncertainty. Stoelhorst stresses that Barney (1986) explains profits,
while Barney (1991) explains rents.
Page 2 of 19
, ToS 4.2 – Schumpeterian View II: Expectations and Creative Destruction
Profit (Schumpeterian / Rent (Ricardian / efficiency)
entrepreneurial / Knightian)
Concerns Value creation Value appropriation
Accrues to A bundle (configuration) of An individual resource
resources
Logic Dynamic, disequilibrium Static, equilibrium
Driven by Uncertainty Resource heterogeneity (scarce,
fixed supply)
Duration Temporary: competed or Persists as long as the resource
bargained away in product and stays scarce and heterogeneous
factor markets
Key author in this Barney 1986, Schumpeter, Ricardo, Barney 1991, Peteraf 1993
course Austrians
The Ricardian land example (lecture slides)
The lecture uses a numerical story to show how profit arises and then turns into rent.
1. Situation 1 (demand = 200). One fertile plot (landowner A) produces 200 units. Costs:
labour 25, capital 50, land rent 50 (the landowner's opportunity cost), entrepreneur 25
(his opportunity cost) = 150. Price = = 0.75. Everyone just earns their
opportunity cost: zero economic profit.
2. Situation 2 (demand rises to 300). A less fertile plot B must be farmed, producing only
100 units at the same cost of 150. Price is set by the marginal firm: P = MR = MC = 150 /
100 = 1.50.
3. Who gets the gain on plot 1? Revenue on plot 1 is now 200 × 1.50 = 300. Contracted
payments stay: labour 25, capital 50, rent 50. The entrepreneur, as residual claimant,
gets 300 − 125 = 175: his 25 opportunity cost + 150 entrepreneurial profit.
4. When contracts expire, landowner A is in a competitive bargaining position and
appropriates the 150 as a Ricardian (efficiency) rent. Profit has become rent.
5. Why could the entrepreneur get such a good contract? Because of uncertainty. Had
the demand rise been generally anticipated, the landowner would have priced the land
higher from the start.
Principle (lecture numbering, Principle 4 / study guide table Principle 5): given
uncertainty, firms can earn an economic profit by bringing new combinations to market,
but uncertainty by itself only allows a temporary profit.
Page 3 of 19
