The Natural Emergence of Category Effects on Rugged Landscapes

Abstract

Category theory finds that markets partition producers into categories and producers who do not fit one specific category—or who span multiple categories—perform worse than their single-category peers. The dominant thread of this work argues that this miscategorization penalty arises when cognitive limits of categorization cause individual members of the market’s audience to exclude or denigrate ill-fitting producers. I present a null model of markets in which a miscategorization penalty appears without being caused by a market audience: drawing on cognitive science and research on rugged landscapes, the model shows that producer herding behavior generates a spurious correlation between market outcomes and miscategorizations. The model further predicts the dynamics of categorical emergence and change over time. I establish these results in a simulation and discuss strategies by which this landscape model can be empirically distinguished or integrated with the standard account of an audience-driven penalty. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2020.13770 .