Enterprise Forms and Economic Efficiency

Capitalist, Cooperative and Government Firms

Kazuhiko Mikami

• Publisher: Taylor & Francis
• Year: 2011
• Print ISBN: 9780415610063
• eBook ISBN: 9781136672569
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The book conducts a comparative study on the form of enterprise, focusing on broadly defined cooperative firms in comparison with conventional capitalist firms. It explores the essential advantages and disadvantages of the different types of firms and attempts to answer why capitalist firms are so prevalent in our economy.

The book attempts to explain these questions from the viewpoint of "market failure" in the framework of standard microeconomic theory. In this analytical framework, it proposes an alternative system of business organization based upon consumer cooperatives and the market for their memberships, which can coexist consistently with the system of capitalist firms and the stock market within a single market economy.

The existing studies of the cooperative sector have been rather ideological. The analytical framework that is presented in this book helps promote scientific exploration of cooperative and other types of firms, which are indispensable and potentially promising constituents of our society.

1 Market power and the form of
enterprise¹

1.1 Introduction

The first three chapters of this book are devoted to studying the effects of three major causes of market failure – market power, asymmetric information, and externalities – on efficient forms of enterprise. In this chapter, we examine the implications of market power for the efficient form of enterprise.

We consider three types of firms: a capitalist firm (a firm owned by the suppliers of capital), a worker cooperative (a firm owned by the workers), and a consumer cooperative (a firm owned by the customers). We assume that these firms have market power in the markets where they sell and buy goods and services. That is, a capitalist firm has power in the labor market and monopoly power in the product market. A worker cooperative has power in the rental market for physical capital and monopoly power in the product market. A consumer cooperative has power in the rental market for physical capital as well as in the labor market. In these circumstances, we ask which type of firm achieves the most efficient resource allocation in the economy.

This research is motivated in part by fascinating empirical observations made by Hansmann (1996). For example, in the United States, agricultural marketing cooperatives, which can be identified as a kind of supplier cooperative, were most successful in the early twentieth century, when firms that operated grain elevators and purchased agricultural products from farmers used to form effective cartels and had strong power over farmers (Hansmann 1996, pp. 122–125). As another example, farm supply cooperatives, a kind of consumer cooperative that furnishes the member farmers with farm supplies such as fertilizers and petroleum, had a significant market share in the period when the market for those inputs was highly oligopolistic (Hansmann 1996, pp. 149–151). In these examples, imperfect competition seems to have encouraged the establishment, and promoted the prosperity, of cooperative firms. We will return to such examples in reality in more detail in Section 1.4.

On the other hand, theoretical study of the relationship between market power and enterprise form has been developed along two different lines. The first line of research involves analyzing the performance of individual firms in different forms. For example, Ireland and Law (1982) compare the efficiency of a capitalist firm and a labor-managed firm when they have monopoly power in the product market. Alternatively, Stewart (1984) compares the efficiency of the two types of firms when they have monopsony power in the labor market. We will return to their arguments in more detail in connection to our study in Subsection 1.5.2. The second line of research focuses on the efficiency of the market in which different types of firms coexist. Among others, Sexton and Sexton (1987) consider a monopoly market with a single capitalist firm and examine the effects of entry by a consumer cooperative into the market. Cremer and Crémer (1992, 1994) study the possible outcomes of a mixed duopoly by a capitalist firm and a labor-managed firm. Ireland and Stewart (1995) compare the consequences of three kinds of duopolies; i.e. a duopoly of two capitalist firms, that of one capitalist firm and one labor-managed firm, and that by two labor-managed firms.

In principle, the analysis in this chapter falls under the first line of research, with some relevance to the second line. Two features distinguish our study from previous ones, however. First, while most of the existing literature deals with capitalist and labor-managed firms, we include a consumer cooperative as a third type of firm in the comparative study. Second, and more importantly, we distinguish these three types of firms (i.e. a capitalist firm, a worker cooperative, and a consumer cooperative) not by their predetermined objective functions but by the allocation of ownership rights to the firm over groups of individuals. This allows us to model the three kinds of firms in a symmetric manner. From the standpoint of these two features, we next illustrate similarities and dissimilarities between our study and previous studies by referring to Stewart (1984) and Sexton and Sexton (1987).

Stewart (1984) compares the efficiency of a capitalist firm with that of a labor-managed firm of the Ward (1958) type, which is assumed to maximize net income per worker, in a monopsonistic market. In his model, a capitalist firm has normal monopsony power in the labor market, whereas a labor-managed firm faces a kind of participation constraint in that net income per worker must be greater than the wage paid by the capitalist firm. Such an asymmetry in the process of procuring labor gi...

Table of contents

• Front Cover
• Title Page
• Copyright
• Contents
• List_of_figures
• List_of_tables
• Preface
• Overview
• 1 Market power and the form of enterprise
• 2 Asymmetric information and the form of enterprise
• 3 Externalities and the form of enterprise
• 4 The predominance of capitalist firms in the market economy
• 5 An alternative system of business organization in the market economy
• Notes
• Bibliography
• Index