MARKET FAILURE AND ENTREPRENEURIAL OPPORTUNITY.

Abstract

Although an understanding of the sources of entrepreneurial opportunity is essential to explaining the emergence, transformation, and economic impact of organizations, little systematic, theory-driven analysis exists concerning why, when, and how opportunities for the creation of goods and services come into existence. Drawing upon theory from welfare economics, this paper introduces a conceptualization of entrepreneurial opportunity as the potential to improve the efficiency of markets. Economic discussions of market efficiency have produced categories of market failure, which we show to be analogous to a typology of entrepreneurial opportunity when viewed through the lens of entrepreneurial action. We examine the transaction obstructions inherent to each category of market failure and explain how these obstructions provide predictable and lingering pockets of entrepreneurial opportunity. Finally, we provide historical and hypothetical examples of how entrepreneurs have exploited or could exploit each type of opportunity and discuss the implications of our typology upon opportunity identification by actors inside and outside of organizational contexts.