The relationship between these factors and the equilibrium choice of modes is fully characterized. A decentralized organization gives freedom to store managers to adopt their own ideas and disseminates innovations made by store managers. The difference in average profit between the centralized and decentralized organizations is found to be a non-monotonic function of innovative opportunities. The centralized organization is preferred when innovative opportunities are moderate while the decentralized organization is preferred when such opportunities are rich.
Centralization also tends to fare better in environments in which ideas are relatively complex.
This paper shows that this effect breaks down in the presence of firm-specific cost shocks. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation. Search takes place over a rugged landscape defined over the space of store practices. The main objective of this research is to determine how the amount of discretion given to store managers, as to how they run their stores, influences the rate of innovation at the store level. We find that greater decentralization enhances firm performance when stores' markets are sufficiently different, the horizon is sufficiently long, and markets are sufficiently stable.