Producer Exploration can Generate Categories without Audiences
Category theory argues that markets function as an interface between producer candidates and audiences that evaluate those candidates. Audiences lump similar producer into categories in order to facilitate their search process, so that producers who do not fit into one specific category -- or who span multiple categories -- are penalized relative to their single category peers. I present an alternative model of the world in which producers in a market segregate into categories but without any reliance on an audience process: instead categorical boundaries reflect producers' best efforts to explore a complicated marketplace given their limited information about what audiences demand. Categories emerge as a cross-sectional consequence of a dynamic exploration process: At any given time, the world features a mix of high-performing producers within categorical clusters and low-performing producers outside or between them. But spanning positions are more likely to be occupied by entrepreneurial producers, and future categorical clusters emerge from their efforts to explore the terrain. As such any apparent category spanning discount is nothing more than the consequence of bad luck in the process of taking risk. I establish this result in a formal model and illustrate in simulations.