Chapter 7: Economics of Business Modeling: An Essay on the Economic Foundations of Managing Business Models

The business model concept has become an important research theme in strategy and entrepreneurship. Nevertheless, its theoretical foundation has received little attention. This chapter seeks to narrow this gap by drawing on organizational economics. First, from a dynamic view, I introduce the concept of business modeling defined as the process of developing and continuously adjusting a business model. I argue that business modeling in its current form may only have been discussed incompletely and implicitly in the neoclassical economics where the firm is a black box whose function is to maximize profit and its business model could be just an oversimplified production logic. Then, I posit that the Austrian economics and its desire to open the firm black box offers a more realistic, and serious explanation of the business model, its function, formation, and evolution. I will show that five economic theories including the transaction costs theory, property rights theory, agency theory, resource-based theory and dynamic capabilities theory provide a more complete picture of how executives develop and manage business models. Implications of this argument will be discussed and several directions for future research will be illuminated.