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Competition: The economics of industrial change
International
Journal
of Industrial
Organization
BOOK
8 (1990)
161-164.
North-Holland
REVIEWS
Paul Auerbach, Competition: The Economics Blackwell, Oxford, New York, 1988) pp. 339.
of Industrial
Change (Basil
Auerbach’s is an intelligent, well written book that questions the validity of both the static, empirical models of industrial economics and the theoretical models that underpin them. Auerbach asserts that applied economics relies principally on a Marshallian synthesis that ‘incorporates a predominantly static approach to competition, while adding sufftcient elements from the dynamic approach to make it plausible as a practical model’ and that the synthesis ‘has been a failure (p. 8)‘. He bases this assertion on a few major postulates. One of Auerbach’s dominant tenets is that competition is a dynamic process of change and evolution, not a static process of cause and effect. Hence, while a static framework may be analytically precise, it is inaccurate in describing the competitive process. This belief in competition as a dynamic process has certain ramitications. One of the most fundamental is that structure, conduct and performance are all interrelated. Hence, structureperformance studies are flawed because they assume that structure predicts behavior when in reality structure’s influence on behavior is complemented by behavior’s influence on structure. (As an example, Auerbach suggests that while structural entry barriers may indeed affect performance, isn’t one measure of performance the creation of structural entry barriers?) Auerbach’s belief in competition as a process affects the orthodox use of markets as well. Auerbach argues that market driven structure-performance studies are fairly meaningless because (1) there exist no consistent and objective criteria for delineating markets, (2) since markets can not be delineated, market measures such as concentration, etc. are meaningless, and (3) static market definitions are not useful because market boundaries (if they exist) change over time and are influenced by firm behavior. The implicit conclusion that a reader of this book must draw is that most orthodox empirical analysis is flawed. Auerbach seems to look at competition as a process of change and evolution. Individuals as the controllers of firms make decisions within the context of time and history. ‘Markets’ evolve because people make them evolve by the force of their actions. There is no universal causal link between structure and behavior. Rather. structure and behavior evolve over time as Ol67-7187/90/53.50
E
1990. Elsevier
Science
Publishers
B.V. (North-Holland)
162
Book
reviews
history, circumstance and expectations that form the future.
move individuals to make decisions
David I. Rosenbaum University of Nebraska-Lincoln
Jean Tirole, The Theory Cambridge, MA) pp. 479.
of Industrial
Organization
(MIT
Press,
1988,
This is an important book. If only because of its size: it has a larger than usual format, is heavy to carry around and difficult to find a place for on one’s shelves. But it is worthwhile carrying and studying it: for a long time it is going to be the standard reference on theoretical IO. Its scope is impressive: while it does not cover the empirical side of the field nor the antitrust experience, it does cover what looks like the whole of the theory of pricing outside general equilibrium theory. Indeed, it fully reflects the invasion of industrial economics by theorists in the 1970s as a result of their dissatisfaction with models of competitive general equilibrium. Tirole himself regrets the current very high ratio of theory to empirical evidence and expresses the wish that theory will soon feed back to empirical analysis (not only through an econometric renaissance but especially through detailed case studies and controlled experiments). I have no doubt that this book will indeed stimulate new empirical approaches. Let me also add that it would be unfair to criticize the author for not reviewing the already ongoing renewal on the empirical front: after all, theory has to come first. And the theoretical achievements are impressive enough. Let me reassure the readers whose rational expectations tell them this book is going to be too technical: although it is a masterly display of technical competence, economic intuition is always present, before a problem is set up and after it is solved. The formalization itself is also kept simple (2 goods, 2 periods rather than n goods and T periods) and the usual calculus generally sufftces. Yet, the reader is introduced to the most recent literature. What impresses me most, perhaps, is the way in which Tirole manages to establish links between models that look different at first sight: multiproduct and multiperiod models, signalling in terms of production, price, quality or investment, models with and without strategic interaction. Cross-references to other chapters are always present. Is this then going to be the standard textbook for the coming years? The organization of the book is indeed that of a textbook: in each chapter there is a main text, intended for undergraduate and first-year students, plus a supplementary section which presents more advanced material. Exercises are
Journal
of Industrial
Organization
BOOK
8 (1990)
161-164.
North-Holland
REVIEWS
Paul Auerbach, Competition: The Economics Blackwell, Oxford, New York, 1988) pp. 339.
of Industrial
Change (Basil
Auerbach’s is an intelligent, well written book that questions the validity of both the static, empirical models of industrial economics and the theoretical models that underpin them. Auerbach asserts that applied economics relies principally on a Marshallian synthesis that ‘incorporates a predominantly static approach to competition, while adding sufftcient elements from the dynamic approach to make it plausible as a practical model’ and that the synthesis ‘has been a failure (p. 8)‘. He bases this assertion on a few major postulates. One of Auerbach’s dominant tenets is that competition is a dynamic process of change and evolution, not a static process of cause and effect. Hence, while a static framework may be analytically precise, it is inaccurate in describing the competitive process. This belief in competition as a dynamic process has certain ramitications. One of the most fundamental is that structure, conduct and performance are all interrelated. Hence, structureperformance studies are flawed because they assume that structure predicts behavior when in reality structure’s influence on behavior is complemented by behavior’s influence on structure. (As an example, Auerbach suggests that while structural entry barriers may indeed affect performance, isn’t one measure of performance the creation of structural entry barriers?) Auerbach’s belief in competition as a process affects the orthodox use of markets as well. Auerbach argues that market driven structure-performance studies are fairly meaningless because (1) there exist no consistent and objective criteria for delineating markets, (2) since markets can not be delineated, market measures such as concentration, etc. are meaningless, and (3) static market definitions are not useful because market boundaries (if they exist) change over time and are influenced by firm behavior. The implicit conclusion that a reader of this book must draw is that most orthodox empirical analysis is flawed. Auerbach seems to look at competition as a process of change and evolution. Individuals as the controllers of firms make decisions within the context of time and history. ‘Markets’ evolve because people make them evolve by the force of their actions. There is no universal causal link between structure and behavior. Rather. structure and behavior evolve over time as Ol67-7187/90/53.50
E
1990. Elsevier
Science
Publishers
B.V. (North-Holland)
162
Book
reviews
history, circumstance and expectations that form the future.
move individuals to make decisions
David I. Rosenbaum University of Nebraska-Lincoln
Jean Tirole, The Theory Cambridge, MA) pp. 479.
of Industrial
Organization
(MIT
Press,
1988,
This is an important book. If only because of its size: it has a larger than usual format, is heavy to carry around and difficult to find a place for on one’s shelves. But it is worthwhile carrying and studying it: for a long time it is going to be the standard reference on theoretical IO. Its scope is impressive: while it does not cover the empirical side of the field nor the antitrust experience, it does cover what looks like the whole of the theory of pricing outside general equilibrium theory. Indeed, it fully reflects the invasion of industrial economics by theorists in the 1970s as a result of their dissatisfaction with models of competitive general equilibrium. Tirole himself regrets the current very high ratio of theory to empirical evidence and expresses the wish that theory will soon feed back to empirical analysis (not only through an econometric renaissance but especially through detailed case studies and controlled experiments). I have no doubt that this book will indeed stimulate new empirical approaches. Let me also add that it would be unfair to criticize the author for not reviewing the already ongoing renewal on the empirical front: after all, theory has to come first. And the theoretical achievements are impressive enough. Let me reassure the readers whose rational expectations tell them this book is going to be too technical: although it is a masterly display of technical competence, economic intuition is always present, before a problem is set up and after it is solved. The formalization itself is also kept simple (2 goods, 2 periods rather than n goods and T periods) and the usual calculus generally sufftces. Yet, the reader is introduced to the most recent literature. What impresses me most, perhaps, is the way in which Tirole manages to establish links between models that look different at first sight: multiproduct and multiperiod models, signalling in terms of production, price, quality or investment, models with and without strategic interaction. Cross-references to other chapters are always present. Is this then going to be the standard textbook for the coming years? The organization of the book is indeed that of a textbook: in each chapter there is a main text, intended for undergraduate and first-year students, plus a supplementary section which presents more advanced material. Exercises are