Research Summary Digital firms tend to be both narrow in their vertical scope and large in their scale. We explain this phenomenon through a theory about how attributes of firms' resource bundles impact their scale and specialization. We posit that highly scalable resource bundles entail significant opportunity costs of integration (vs. outsourcing), which simultaneously drive “hyperspecialization” and “hyperscaling” in digital firms. Using descriptive theory and a formal model, we develop several propositions that align with observed features of digital businesses. We offer a parsimonious modeling framework for resource‐based theorizing about highly scalable digital firms, shed light on the phenomenon of digital scaling, and provide insights into the far‐reaching ways that technology‐enabled resources are reshaping firms in the digital economy. Managerial Summary Why are leading firms in the digital economy simultaneously larger and more specialized than those in the industrial age? Our research explains this phenomenon as being driven by the scalability of digital resources—that is, their capacity to create more value at larger scales when used intensively in a focal activity. We clarify what digital scalability means, and highlight trade‐offs created by the opportunity costs of not employing scalable digital resources intensively. Digital firms should outsource complementary activities to avoid diverting resources away from their scalable core, and to enhance their ability to grow exponentially. Although resource fungibility and outsourcing costs mitigate these imperatives, digital firms may nonetheless find it profitable to remain specialized despite the challenges of managing outsourcing and sharing value with complementors.

In this study, we examine the nature of Schumpeterian competition between entrants and incumbents. We argue that incumbents may respond to the threat of entry by either attacking the entrant or trying to learn from it, and that entrants, in turn, may react by either reciprocating the incumbent’s advances or retreating from it. Putting these competitive choices together, we develop a framework of four distinct potential scenarios of Schumpeterian competition. In particular, we emphasize a scenario we term creative divergence, wherein incumbents try to learn from entrants and build on their technologies, but their investments to do so cause entrants to retreat, resulting in diminishing returns to learning investments by incumbents. Exploratory analyses of the U.S. cardiovascular medical device industry find patterns consistent with the creative divergence scenario, with incumbent knowledge investments helping them to learn from entrants, but these learning benefits being undermined as entrants move away from incumbents. The online appendices are available at https://doi.org/10.1287/orsc.2018.1264 .

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Research Summary The division of labor allows individuals to focus their time on a narrower band of activities and increase productivity through specialization, but this comes at a cost. When individuals divide labor, they divide value and split the “pie” they help create. In this article, I formally model this tradeoff and examine how it is affected by opportunity‐cost considerations due to market characteristics. I then test the empirical predictions of the model in the residential real estate brokerage industry in Southeast Michigan. Consistent with the predictions, I find that the division of labor is more likely for properties in the midrange of the price distribution and in larger markets, but less likely at the tails and in markets where property prices exhibit substantial heterogeneity. Managerial Summary Today, with the diffusion of digital labor markets and the emergence of the gig economy, the organization of economic activity relies on an ever‐finer division of labor. In this article, I examine how the division of labor is affected by the cost of dividing value, which emerges when middlemen take a cut of transaction revenues. Using data from real estate, I find the cost of dividing value can increase agents' incentives to cut out the middleman for high‐value and low‐value transactions, especially when the disparity between valuable transactions and the rest is large and when the availability of valuable transactions is limited. These findings shed light on the mechanisms aggregating individual endeavors into broader economic objectives, whether mediated by markets, online platforms, or organizations.

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