Recent Developments in the Theory of Industrial Organization.

Schap, David

Thomas Wolfe is right: You Can't Go Home Again. My research over the last decade has drawn me ever farther away from the field of industrial organization, in which I did field work during graduate studies and some research and publishing early in my career. Preparing this review presented for me an opportunity to return to my roots, albeit knowing full well from the title of the book that much besides my own perspective would be different. I would not make too much of a personal experience except that in my department of a dozen economists there are in fact two others who have similarly moved on from industrial organization origins. Even if fewer than three-twelfths of all economists have had an experience similar to my own, those few will find the volume under review to be an excellent choice for recapturing much of what has been missed during the last decade.

For those that judge a book if not by its cover then by its table of contents, let me provide the following set of abbreviated facts. The book is cohesively organized into an introduction plus four major parts: "Recent Approaches to Industrial Organization," "The Behavior of Individual Firms and the Characteristics of Industrial Systems," "The Theory of the Firm and Industrial Organization," and "Technical Progress and Market Structures." A fairly accurate characterization is that the introduction and the chapters in the first of the four parts primarily seek to describe the present state of development in industrial organization whereas the book's remaining chapters seek to be themselves new developments in industrial organization. Consequently, specialists in industrial organization may be drawn to the second portion of the book (as just characterized) while readers such as myself, yearning to get reacquainted with industrial organization, will find the first portion satisfying.

Although nowhere mentioned in the front matter, my reading of footnotes revealed that the book arose out of papers presented at a conference bearing the same title as the book, convened April, 1989 in Naples, Italy. Conference volumes are notorious for being a reviewer's nightmare in that there is little opportunity for deep analysis of any of the contributions if the entire volume is to be described. As a compromise I intend to complete a full but at times undetailed review of the entire contents, with apportionment of space reflecting my interest as described in the previous paragraph.

The editor's introduction serves the book well. Rather than slavishly summarizing each subsequent chapter, the editor drew directly on the general industrial organization literature, thereby avoiding a sterile, blow-by-blow account of the book's remainder. Of course, references to specific points made by the book's contributors are scattered throughout the introduction, but the introduction is not encyclopedic. The editor's reflections herald themes that subsequently emerge from the remainder of the book. The overarching theme is that if ever industrial organization was a unified field of inquiry exploring the function of the market, it certainly is not that presently. Its questions have expanded greatly in number and kind; its methodologies are often at odds.

Part I, Recent Approaches to Industrial Organization, begins with a chapter by John Sutton: "Implementing Game-Theoretic Models in Industrial Economics." Sutton highlights the tension in the desire for models that are sufficiently well detailed to yield precise prediction and simultaneously capable of wide and robust application across industries. The tension appears incapable of resolution to Sutton, who calls for a two-pronged approach in which models attempting breadth of application complement detailed, single-industry models.

Next in Part I is Giovanni Dosi's chapter, "Performances, Interactions and Evolution in the Theory of Industrial Organization." This carefully crafted piece exhibits at once erudition, insight and wit. Dosi explores the differences among (and sometimes similarities of) three approaches in modern industrial organization--structuralist, rational/equilibrium, and evolutionary--forcefully advancing the cause of evolutionary approaches.

John D. Hey closes Part I with a chapter devoted to "Experiments in Industrial Organization," the most polemic of the book's entries. According to Hey, industrial organization "cries out for experimental investigation: its theories lack precision, its conclusions lack unanimous support, and useful non-experimental data is conspicuous by its paucity". His empassioned plea for experimental research in industrial organization makes for exciting reading. His contempt for the newest generation of industrial organization theoreticians is thinly veiled, perhaps sheer: the "bright young things" is his favored appellation for these theorists. In contrast, one reads that it is by conducting experiments that an economist can truly earn the title of scientist. Whether you agree with Hey or not, this chapter will hold your interest!

Part II, The Behavior of Individual Firms and the Characteristics of Industrial Systems, consists of four papers. "On Imperfect Competition and Macroeconomic Analysis," by Malcolm C. Sawyer, will appeal primarily to readers interested in issues involving the macro labor market. "Flexibility and Industrial Organization Theory," written by the editor and Fabio Massino Esposito, argues that observed heterogeneity of both firm size and organizational structure is entirely consistent with the notion of equilibrium; the writers are led to this conclusion by noting the need for organizations to be able to respond to variations in the economic environment, in a way likened to the notion of adaptation in certain biological models. "Monopoly Capitalism Revisited" is just what its name describes: Keith Cowling updates, extends, and responds to critics of his 1982 book, Monopoly Capitalism. Next, Roberto Marchionatti and Francesco Silva describe in detail "Industrial Economics in Italy."

Part III, The Theory of the Firm and Industrial Organization, contains three papers. Neil Kay examines joint ventures in "Collaborative Strategies of Firms: Theory and Evidence." Next follow two shorter chapters: "The Multinational Firm and the Theory of Industrial Organization," by Nicola Acocella; and "The Behavior of Risk-Averse Firms in a Duopolistic Market," by Riccardo Martina.

The three chapters in Part IV contemplate Technical Progress and Market Structures. Paul Stoneman exclusively focuses on his subtitle in "Technological Change and Market Structure: The Diffusion Dimension," while Damiano Silipo explores more generally "Inventive Activity and Risk Aversion." The closing chapter in Part IV, like that of Part II, pays homage to the conference site; the chapter is "Market Structure, Firm Size and Innovation in Italy: An Integrated Approach to Testing Schumpeter," by Niall O'Higgins and Patrizia Sbriglia.

This volume is a fine collection, well worth the attention of specialists in industrial organization. I commend it especially to those who, like myself, wish to visit for a time with what was once familiar, but now is changed.