The Economics of Industries and Firms

Malcolm Sawyer

• Publisher: Routledge
• Year: 1985
• eBook ISBN: 9781134962952
• Topic: Business
• Subtopic: Business General
• Index: Business

Published in 1985, "The Economics of Industries and Firms" is a vaulable contribution to Economics.

PART ONE:

ECONOMICS OF INDUSTRY

1
AN INTRODUCTION

The central aim of this book is to provide an overview of the ways in which economists have studied the operation of privately-owned industry under the general heading of industrial economics. Industrial economics has many facets which are reflected in this book. One has been the development of theories of firm behaviour. Some of these theories group firms together in industries and explore the consequences of the operation of independent firms within an industry. Other theories treat firms as individual entities. But the theories share the common feature of postulating objectives for the firms (whether profit maximisation, growth of sales maximisation, satisficing, etc.) and investigate the consequences of the pursuit of these objectives. Another facet, which is given particular attention here, is the examination of the empirical validity of the various theories. This examination requires that predictions be derived from the theories in a form amenable to empirical investigation and that the relevant variables can be measured. Undertaking these tasks can prove rather difficult as our discussion below will show.

The performance of privately-owned industry is of central importance for the overall productive efficiency of a private enterprise economy, and consequently it is not surprising that economists have not been slow in drawing out the implications of their theories and evidence for public policy. The discussion of government industrial policy provides a third major facet of industrial economics.

It would be misleading to pretend that there is one widely accepted approach to industrial economics. The aim of this book is to present the major approaches to industrial economics (and to specific parts of it) and to examine the evidence relevant to these various approaches. The decision on which approach, if any, is acceptable is left to the reader. Four particular approaches to industrial policy are outlined in Chapter 15, and that chapter provides a summary of the essential points of the major approaches to industrial economics.

The unbiased presentation of conflicting approaches is difficult, if not impossible. There is the need to make a selection of which approaches and which parts of particular approaches to discuss. Thus references are provided for the reader to follow up any particular approach. But anyone writing a text-book must become immersed in its subject matter, and form views on the validity or otherwise of the various approaches. The views of the current author are essentially contained in Aaronovitch and Sawyer (1975a).

This book does not intend to cover everything ever written on industrial economics, but rather to provide a framework within which the student can pursue further study. It seeks to indicate the major issues of industrial economics, to relate the important theories and evidence pertaining to those issues, and to give guidance for further reading. A satisfactory study of industrial economics would require that many of these references for further reading be pursued. The references given are of three types. There are references which serve to indicate the source of a particular piece of information, theory or evidence. There are references for further reading on the topics discussed, and both of these types of references are generally given in the text. Finally, there are references given in notes for reading in areas of economics which have been taken as part of the reader’s knowledge and for those parts on economics on the boundaries of industrial economics. References are given in terms of the author and year of publication (with the suffixes a, b, etc., used where more than one publication in a year by the author is referred to) and the full references are given in the Bibliography at the end of the book.

A common format has also been used with symbols. Throughout the book, each symbol retains its own meaning, which is explained on its first usage in each chapter. Thus, for example, A is used throughout for advertising expenditure. A list of the symbols used and their meaning is given on page vii. In presenting regression results, we have adopted the common format of presenting standard errors in parenthesis under the estimated coefficient even when t-ratios were used in the original source.

One of the major aims of this book is to present and discuss the alternative approaches in a manner which leads to the derivation of hypotheses which can be confronted with the evidence. In doing this, we accept the line of argument that an important aspect of the acceptance (or rather non-rejection) of a theory is the ability of that theory to generate testable predictions which are in line with observations. But in applying this approach we must be careful of falling into the trap which says that only theories which provide predictions are worthwhile (Friedman, 1953). Thus there are many other desirable characteristics of a theory besides ability to predict adequately. These desirable characteristics could include explanation, insight and simplicity. Further, a theory may predict well, but only make predictions about features which are regarded as of little importance. The important features of the real world which we hope a theory will explain and for which we hope it will make testable predictions have to be decided.

When the hypotheses and predictions of the theories are subject to empirical investigation, the form of that investigation will generally be in the form of the use of econometric regression analysis. An outline of econometric techniques widely used in industrial economics and the problems which often arise are given in Chapter 2.

Two other techniques by which theories can be appraised are also widely used. The first is the use of case studies to investigate a particular industry to see whether that industry conforms to a particular theory. More usually case studies are used to illustrate theories rather than test their validity. As the price of computer time to estimate regressions has fallen and the price of research time to conduct case studies has risen, industrial economics has made relatively less use of case studies. The work reported in this book reflects this, although there are some areas (notably Chapter 4 in the use of the engineering approach in the estimation of cost conditions) where case studies have been used.

The other technique of appraisal is essentially direct calculation of the phenomenon under review across a larger number of firms. For example, part of the appraisal of the view that there has been a ‘managerial revolution’ which has changed the objectives of the firm involved is through a direct investigation of the extent of managerial or owner control in large corporations.

There has been intermittent discussion of the relative merits of these different techniques, particularly between regression analysis and the case study approach. Regression analysis has the advantage of being able to make allowance for the impact of many variables on the variable of interest. Whilst with the advent of computers the estimation of regression equations has become an easy undertaking, nevertheless regression analysis is limited to variables for which statistics are readily available (often from government sources). Case studies in contrast tend to be labour intensive but may be able often to investigate the impact of factors which are difficult to measure. The results reported from the use of either technique are likely to be influenced by the judgement of the investigator. With case studies it is clear that the judgement of the investigator is involved when trying to assess the impact of factors which are difficult to measure. But also the investigator using regression analysis has often to choose between alternative measures for the variables and between the large number of regressions which the computer produces.

In many respects much of industrial economics rests on a deductive approach which proceeds from a set of assumptions and seeks to produce predictions from those assumptions, and this is followed by seeking to test those predictions against reality. The deductive approach has largely taken over from the inductive approach which often used an intensive and largely descriptive study of a particular industry to generate general ideas concerning the operation of industry. The two approaches are not as separate as might appear, for many of the assumptions which are used as the basis of the theories have been generated by intensive case studies.

There are two basic approaches to industrial economics. One of these approaches focuses on the interaction of firms within a particular industry, where the characteristics of the industry in terms of number and relative size of firms, ease of entry, elasticity of demand for products, etc., are important determinants of the performance and behaviour of that industry. Within this broad approach, the structure-conduct-performance paradigm has been widely used. In Part One, our attention falls mainly on this approach. We systematically explore the key characteristics of industrial structure in terms of the number and relative size of firms (Chapter 3), the cost conditions (Chapter 4), and the behaviour of firms including collusion and attitudes to new firms (Chapter 5). Then we investigate the impact of structure on profitability (Chapter 6), advertising (Chapter 7), technical progress (Chapter 8) and price changes (Chapter 9). In each of these chapters we consider the topic in a broader context than merely the impact of industrial structure on that element of performance. The final chapter in this part provides a critical assessment of the structureconduct-performance approach (as well as the broader approach of focusing on industries rather than firms).

The alternative approach, which underlies Part Two, is to treat the firm as central in the analysis, and implicitly pay little regard to the influence on a firm’s behaviour and performance of the industries in which it operates. Thus firms are taken as central, industrial structure as peripheral. There will be some effect on, say, a firm’s profits arising from the general profit experience of the industries in which it operates but this is taken as dominated by the nature and efficiency of the firm itself. In Chapter 11, we survey the empirical literature relevant to the managerial theories of the firm including the questions of whether there has been a shift of control from shareholders to managers (the so-called managerial revolution) and whether growth and profitability are influenced by differences in control as between owner-control and manager-control, and the determinants of managerial income, and possible incentive effects arising from those determinants. This chapter also addresses the question of whether the internal organisation of the firm influences its performance. The relationship between growth, profitability and size of firm is the first topic investigated in Chapter 12, which is followed by a discussion on the forces influencing horizontal and vertical integration and diversification. In Chapter 13 theories of acquisition and mergers are outlined, and then the empirical evidence relating to those theories and on the consequences of acquisitions is examined. This list of topics indicates that it is features of the firms, rather than features of industries in which they operate, which are the central features of the analysis.

In the third part of the book there is a discussion of public policy towards industry and firms. The discussion is undertaken in three stages. In Chapter 14, the question of whether the welfare losses imposed on consumers and the economy by monopoly are substantial is examined. These welfare losses are intend...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Abbreviations
• Preface to the Second Edition
• Part One: Economics of Industry
• Part Two: Economics of Firms
• Part Three: Economics of Policy
• Bibliography