Exploration versus exploitation in the presence of inter-firm comparison

Most of the studies on the trade-off between exploration and exploitation
have considered it as an individual decision problem. In real business
contexts and economic decision making, firms inevitably interact
strategically with other firms and learn from the successes and failures
of other firms. In this paper, we use a computational model to study how
inter-firm comparisons influence firms’ performance when the tradeoff between exploration and exploitation is vital to a firm’s success. We
explore three conditions, varying the information accessible to each firm in
the industry: (1) no information, (2) information on the average performance
of the industry, and (3) information on the best performer of the industry.
Our results show that performance of a firm as a function of exploration
level exhibits an inverse-U shape regardless of the information condition.
Providing information can significantly reduce unnecessary exploration
and increase the performance of the industry, and the effect is greater
when the information on the best performer is provided. The results of the
paper have important policy implications.