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The empirical renaissance in industrial economics
Book reviews
129
They further conclude that these properties cannot be dealt with satisfactorily in Sraftian or input-output models, which simply plot ex post the outcome of innovative processes, rather than the determinants and the processes themselves. They build instead on the Hicksian model of the ‘traverse’, where the economy moves from one growth path to a superior and qualitatively different one, involving not just the re-allocation, but the creation and destruction, of resources. Decisions are sequential, paths of development are irreversible, and human resources and learning primordial. These features are incorporated into a fully worked-out mathematical model, the multifold and fascinating implications of which are explored by the authors. Amongst them, I found particularly fascinating the importance of balancing learning in production (influencing the range of goods on offer), and learning in consumption (influencing the demand curves for these goods); and the more general policy conclusion that ‘. . . the most important aspect of policy intervention is its articulation through time, that is not so much how much as when.’ (p. 106). This book is required reading for all those interested in the macroeconomic implications of the diffusion of radical innovations. It should also be made so for those who persist in believing that the structural imbalances of the past 20 years can be put right solely through conventional macroeconomic policies. Keith Pavitt University of Sussex Falmer, Brighton
Timothy F. Bresnahan and Richard Schmalensee, eds., The Empirical Renaissance in Industrial Economics (Basil Blackwell, Oxford/New York, 1987, published in cooperation with the Journal of Industrial Economics) pp. 264. f25. The empirical renaissance, the field of industrial economics is presumed to experience, has come with a host of elegant mathematical models and advanced econometric techniques. Advanced oligopoly theories can now be put to the test due to the availability of better data. Empirical research in industrial economics consisted traditionally of cross-section analyses of market structures-performance relationships, in a Bainian manner. The ascent of behavioural hypotheses to explain both market structures and performance made the field withdraw from empirical research, since conduct seemed hard to model. The field took a retraite into theory in the early 70s to meet the challenge posed by oligopolistic behaviour. Now, the time seems
130
Book reviews
to have come to put the theoretical advances to the test. The book presents a tine collection of the results of these endeavours, though the shift to more empirical work has not been as pervasive as the title would make one believe. The well established theoretical issue, concerning the relationships between market structures and profitability, is attacked by several authors, using the more sophisticated apparatus. The contribution by Schmalensee on the longlived controversy of market power versus efficiency explanations of profitability is a line example of what the bundle has to offer. The two opposed hypotheses are elegantly specified, applying oligopoly theory of a Cournot character, and decomposed into elasticity, concentration and size effects. The results of the econometric analyses show rather disappointing results, however. The market power hypothesis is weakly supported by 1963 data, whereas the results obtained for 1972 are inconsistent with all hypotheses developed. The clear and interesting Domowitz, Hubbard and Petersen paper compares two opposite hypotheses on cyclical patterns of price-costs margins for a wide range of industries, extending from consumer to producer and from high to low concentrated industries. Both hypotheses (Green-Porter versus Rotemberg-Saloner) are derived from oligopoly supergame models with trigger price strategies, but differ with respect to the modelling of uncertainties. The results are not very conclusive, but weakly support the paper, analyzing RotembergSaloner point of view. The Cubbin/Geroski inter-industry profitability differences, emphasizes inter-industry heterogeneity, and hence is largely in support of the differential efficiency hypothesis. In a theoretical paper by Panzar and Rosse, several tests are developed to establish the existence of monopoly, perfect competition or monopolistic competition in markets. Responses of total revenues to a cost increase are used as indicators for the degree of competitiveness prevailing in a market; reduction indicating monopoly, and increases perfect competition. The specification of responses in monopolistically competitive markets relies heavily on the exit/entry mechanism with neglect of the effects of behaviour on elasticity, described by Chamberlin. The Ashenfelter/Sullivan paper tests a modified Panzar/Rosse hypothesis for the American cigarette industry. The results are not very encouraging, since many price/quantity reactions to an increased excise tax have the wrong sign. A number of interesting papers on some currently debated dynamic close the bundle. The Schumpeterian hypothesis of a positive relationship between R&D intensity and firm size does not fare well in the econometric tests conducted in the Cohen/Levin/Mowery contribution. The papers by Evans and Hall do support the negative relationship between firm size and growth established by Birch and consequently signal a departure from stochastic explanations of size distributions of firms. The bundle leaves the general
131
Book reviews
impression that the return of empirical work has come chiefly to (re)specify and (re)test old hypotheses. Sophisticated empirical analyses are unable to resolve all unsettled questions, however. Some issues remain open because of contradictory results, whereas other issues remain unresolved due to results refuting both opposite hypotheses. The bundle offers a well dosed menu of current issues in industrial economics and should be on the reading list of everybody eager to keep up with the latest developments in the field.
University
Maria Brouwer of Amsterdam Amsterdam
The International Monetary System and its Reform, papers prepared for the Group of Twenty-Four by a United Nations project directed by Sidney Dell, 1979-1986 (North-Holland, Amsterdam, 1987, Contributions to Economic Analysis 162) pp. xviii+ 1030 (in three parts) ISBN 0-444-70227-X, Dfl 450.00/us$200.00. In the discussions and negotiations around the further development or - if one would prefer - reform of international monetary system, the Group of Twenty-four, established in 1971, has come to play a role, side by side with that played by the older Group of Ten. It is to future historians to study the influence of both groups, representing respectively the developing and the developed countries. In the course of the deliberations and negotiations G 24 felt the need for ‘technical support and analysis’. The United Nations agreed in 1975 to establish a project to provide that support and the papers written within the framework of that project are now available for everyone interested, by the set of books under review here. The papers were written during the years 1979 till 1984. The subjects dealt with are well known in the international monetary and financial discussion: more resources for IMF and World Bank, adjustment in and financing for developing countries, the international debt problem, exchange rate systems, the functioning and possible improvement of the international monetary system, the SDR, a possible substitution account. These are problems that are continuously discussed by academic experts, bankers, politicians and staff members of the Bretton Woods institutions and on which views in the industrial world are often very different from the opinions in the developing countries. But some additional subjects are also mentioned, e.g. the position of low income countries in the international monetary system and financial and monetary aspects of cooperation among developing countries and I think it is a good idea to pay more attention to these topics than is usually done in the international discussion.
129
They further conclude that these properties cannot be dealt with satisfactorily in Sraftian or input-output models, which simply plot ex post the outcome of innovative processes, rather than the determinants and the processes themselves. They build instead on the Hicksian model of the ‘traverse’, where the economy moves from one growth path to a superior and qualitatively different one, involving not just the re-allocation, but the creation and destruction, of resources. Decisions are sequential, paths of development are irreversible, and human resources and learning primordial. These features are incorporated into a fully worked-out mathematical model, the multifold and fascinating implications of which are explored by the authors. Amongst them, I found particularly fascinating the importance of balancing learning in production (influencing the range of goods on offer), and learning in consumption (influencing the demand curves for these goods); and the more general policy conclusion that ‘. . . the most important aspect of policy intervention is its articulation through time, that is not so much how much as when.’ (p. 106). This book is required reading for all those interested in the macroeconomic implications of the diffusion of radical innovations. It should also be made so for those who persist in believing that the structural imbalances of the past 20 years can be put right solely through conventional macroeconomic policies. Keith Pavitt University of Sussex Falmer, Brighton
Timothy F. Bresnahan and Richard Schmalensee, eds., The Empirical Renaissance in Industrial Economics (Basil Blackwell, Oxford/New York, 1987, published in cooperation with the Journal of Industrial Economics) pp. 264. f25. The empirical renaissance, the field of industrial economics is presumed to experience, has come with a host of elegant mathematical models and advanced econometric techniques. Advanced oligopoly theories can now be put to the test due to the availability of better data. Empirical research in industrial economics consisted traditionally of cross-section analyses of market structures-performance relationships, in a Bainian manner. The ascent of behavioural hypotheses to explain both market structures and performance made the field withdraw from empirical research, since conduct seemed hard to model. The field took a retraite into theory in the early 70s to meet the challenge posed by oligopolistic behaviour. Now, the time seems
130
Book reviews
to have come to put the theoretical advances to the test. The book presents a tine collection of the results of these endeavours, though the shift to more empirical work has not been as pervasive as the title would make one believe. The well established theoretical issue, concerning the relationships between market structures and profitability, is attacked by several authors, using the more sophisticated apparatus. The contribution by Schmalensee on the longlived controversy of market power versus efficiency explanations of profitability is a line example of what the bundle has to offer. The two opposed hypotheses are elegantly specified, applying oligopoly theory of a Cournot character, and decomposed into elasticity, concentration and size effects. The results of the econometric analyses show rather disappointing results, however. The market power hypothesis is weakly supported by 1963 data, whereas the results obtained for 1972 are inconsistent with all hypotheses developed. The clear and interesting Domowitz, Hubbard and Petersen paper compares two opposite hypotheses on cyclical patterns of price-costs margins for a wide range of industries, extending from consumer to producer and from high to low concentrated industries. Both hypotheses (Green-Porter versus Rotemberg-Saloner) are derived from oligopoly supergame models with trigger price strategies, but differ with respect to the modelling of uncertainties. The results are not very conclusive, but weakly support the paper, analyzing RotembergSaloner point of view. The Cubbin/Geroski inter-industry profitability differences, emphasizes inter-industry heterogeneity, and hence is largely in support of the differential efficiency hypothesis. In a theoretical paper by Panzar and Rosse, several tests are developed to establish the existence of monopoly, perfect competition or monopolistic competition in markets. Responses of total revenues to a cost increase are used as indicators for the degree of competitiveness prevailing in a market; reduction indicating monopoly, and increases perfect competition. The specification of responses in monopolistically competitive markets relies heavily on the exit/entry mechanism with neglect of the effects of behaviour on elasticity, described by Chamberlin. The Ashenfelter/Sullivan paper tests a modified Panzar/Rosse hypothesis for the American cigarette industry. The results are not very encouraging, since many price/quantity reactions to an increased excise tax have the wrong sign. A number of interesting papers on some currently debated dynamic close the bundle. The Schumpeterian hypothesis of a positive relationship between R&D intensity and firm size does not fare well in the econometric tests conducted in the Cohen/Levin/Mowery contribution. The papers by Evans and Hall do support the negative relationship between firm size and growth established by Birch and consequently signal a departure from stochastic explanations of size distributions of firms. The bundle leaves the general
131
Book reviews
impression that the return of empirical work has come chiefly to (re)specify and (re)test old hypotheses. Sophisticated empirical analyses are unable to resolve all unsettled questions, however. Some issues remain open because of contradictory results, whereas other issues remain unresolved due to results refuting both opposite hypotheses. The bundle offers a well dosed menu of current issues in industrial economics and should be on the reading list of everybody eager to keep up with the latest developments in the field.
University
Maria Brouwer of Amsterdam Amsterdam
The International Monetary System and its Reform, papers prepared for the Group of Twenty-Four by a United Nations project directed by Sidney Dell, 1979-1986 (North-Holland, Amsterdam, 1987, Contributions to Economic Analysis 162) pp. xviii+ 1030 (in three parts) ISBN 0-444-70227-X, Dfl 450.00/us$200.00. In the discussions and negotiations around the further development or - if one would prefer - reform of international monetary system, the Group of Twenty-four, established in 1971, has come to play a role, side by side with that played by the older Group of Ten. It is to future historians to study the influence of both groups, representing respectively the developing and the developed countries. In the course of the deliberations and negotiations G 24 felt the need for ‘technical support and analysis’. The United Nations agreed in 1975 to establish a project to provide that support and the papers written within the framework of that project are now available for everyone interested, by the set of books under review here. The papers were written during the years 1979 till 1984. The subjects dealt with are well known in the international monetary and financial discussion: more resources for IMF and World Bank, adjustment in and financing for developing countries, the international debt problem, exchange rate systems, the functioning and possible improvement of the international monetary system, the SDR, a possible substitution account. These are problems that are continuously discussed by academic experts, bankers, politicians and staff members of the Bretton Woods institutions and on which views in the industrial world are often very different from the opinions in the developing countries. But some additional subjects are also mentioned, e.g. the position of low income countries in the international monetary system and financial and monetary aspects of cooperation among developing countries and I think it is a good idea to pay more attention to these topics than is usually done in the international discussion.