What is the meaning of homogeneous firms?

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The assumption of homogenous firms

The assumption of firm homogenous firms is that all companies in an industry setting are identical. There is no reason to go with one firm over another – they are identical from the customer side – and also no differences in terms of the operations of the firm – they are identical from the supplier side.

Homogenous from the perspective of the customers

From the customers’ side, this means no differences in quality, availability, or product characteristics. It also means no loyalty or switching costs – you can easily change suppliers.

Homogenous from the company side

Firms are also considered identical in their operations – no differences in resources or other advantages that would give one firm a cost advantage over the other company.

The implications of homogeneity in firms

The first implication of homogenous firms is that the prices of goods will be the same irrespective of the company  – there is no opportunity for one firm to charge more than another because they produce identical products.

Another implication of homogeneity is that all firms have equal profitability. If all are identical (including the volumes that they sell) – so the same cost structure – then no firm will earn any more than another.

How these assumptions differ from assumptions of resource heterogeneity

While the assumption of firm homogeneity is common in economic theory – and may make sense in situations where there are many firms that are more or less identical – it is quite different from the resource heterogeneity assumption in strategy. 

Resource heterogeneity assumes that firms have different resources – this gives them different cost structures, and also allows them to charge higher prices. This starts to explain differences in industry profitability – certain companies are better set up to compete and can achieve elevated profits relative to others in their same industry.