Transcript Transactions costs and the organization of firms

Concepts of Competition for
Managers
My essay, on moodle
Three Sections
• The textbook model which we have already
discussed.
• A model of competition is not THE model of
competition
• Alchian’s natural selection model of the firm
Three Sections
• The textbook model which we have already
discussed.
• A model of competition is not THE model of
competition
• Alchian’s natural selection model of the firm
Three Sections
• The textbook model which we have already
discussed.
• A model of competition is not THE model of
competition
• Alchian’s natural selection model of the firm
A model of competition is not THE
model
• Our usual model
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Large numbers
Perfect information
Homogeneous products
Free entry and exit
This model has been very successful in
its intended purpose
• A theoretical foundation for ordinary supply
• Existence of general equilibrium
• Efficiency of general equilibrium
– Any competitive equilibrium is a Pareto optimum
– Any Pareto optimum is a competitive equilibrium
(Under restricted conditions)
But a model that is good for one
purpose may not be good
for other purposes
Demsetz interest is was public policy.
• The model is a dramatic simplification
• Though successful, the things that it excludes
may be important in the real world
• And their importance may not merely be that
they make the model less accurate.
Particularly antitrust
• In the standard model, when we see
advertising, we might conclude the presence
of monopoly power.
• In the standard model, if we see firms
engaged in price calculation, we might
conclude monopoly power.
In fact, much of antitrust policy and
other industrial policy has done just
that.
However, these conditions may not
reflect industrial concentration
• Imperfect information, rather than monopoly
power, explains much of advertising.
• Imperfect information, rather than monopoly
is a likely explanation of price calculation
Our purpose in this course is not
antitrust policy, but rather is
understanding the competitive
environment of firms.
More specifically, what is the
competitive environment of my firm?
So, while the formal competitive
model is successful, it may be
misleading for our purposes
New products, new contracts, new
approaches in general
• These are a vital part of any real economy. The
standard model does not accommodate these
very well.
• Competition is a process of discovery
– of prices
– of new products
– of new kinds of relationships, business models,
etc.
Demsetz quotes Hayek
The formal model of competition deprives the
verb “compete” of any real meaning.
Perfect competition, like monopoly, is a quiet
life.
Continuing our theme:
• What kind of a market are we in?
• In real-world competitive markets, there is a
lot of real competing going on.
• And yet true monopoly power may be scarce
and fleeting.
Connections
• To Porter and Koch
A few things about Armen Alchian’s
Uncertainty, Evolution and Economic
Theory
Key Ideas
• In the presence of uncertainty, firms face a
very difficult problem
• There is not a best think to do, but there will
be a best think to have done.
• Profits are the selection mechanism. Positive
profits are necessary for survival
Adoption versus adaptation
• Firms can adapt to the world, but ultimately,
the economy adopts some (they survive) and
rejects others.
• Yet even in a world of pure adoption (no
conscious adaptation) economic models will
predict.
• Those whose behavior is consistent with
efficient responses are more likely to survive
Which is not to say…
…….That there is no role for adaptation.
Efficient methods of various sorts can improve
performance, just don’t expect them all to
work.
Reproduction and variation
• Evolutionary models incorporate survival,
reproduction and variation.
• Profits determine survival
• Imitation is corresponds to reproduction
• Variation?
– Deliberate innovation
– Unintended innovation: Imperfect immitation
Continuity is provided by
• Firms have policies, practices, rules of thumb
that define the firm. (An RBV notion)
• Personnel practices including recruitment,
training and development also play a role
• Enhanced standing for rules of thumb
And yet…
• Long term survival may not demonstrate
insight or wisdom
• Borel trial: Two million Frenchmen flipping
coins. Eight hours a day….etc. If they could
transfer their position in the game to their
heirs, a few dozen are still playing after a
thousand years.