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2019 | Buch

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Industrial Organization

Minds, Bodies, and Epidemics

verfasst von: Prof. Li Way Lee

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book takes the reader on a new tour of the world of firms. We start with a visit to the inside of a firm. We meet the owner and the manager. We look deeply into their mindsets. Then we move outside the firm, to observe the firm's outer features. We pay particular attention to its size, its complexity, its fragility, and its similarity to other firms. In the second half of the tour, we visit communities of firms. We watch waves of mergers, chaos, and bubbles. Before returning, we witness battles between firms and creatures that act like antibodies in our blood: corporate raiders, antitrust agencies, and creative destructors. Throughout the tour, we ask how the things we see are linked. This book encourages the reader to see them as feedback loops. The book’s overarching argument is the importance of the separation of ownership and control and how society must pay more attention to the concept..

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

In this book I study how the separation of ownership and management changes industrial organization. I begin with an examination of the mindsets of the owner and the manager. I notice an obsession with market share, rather than profit. I explain why that comes about, in light of behavioral economics and cognitive psychology. Then I examine four bodily symptoms of the obsession: too big, too complex, too fragile, and too similar. (I call them “The 4 Toos.”) I suggest how they lead to epidemics such as waves, bubbles, and chaos. Finally, I draw the reader’s attention to countervailing forces: corporate raids, antitrust, and creative destruction. In industrial organization, I see these forces as antibodies offering shining rays of hope.

Li Way Lee

The Minds of a Firm

Frontmatter

Chapter 2. Two Minds

Abstract

A firm has two minds: the manager’s and the owner’s. In a small firm, the two minds reside in one person: the owner-manager. In a big firm, the two minds reside in separate persons: one in the owner and the other in the manager. I illustrate the separation of ownership and control with network diagrams. Then I review Ronald Coase’s idea that the nature of the firm is management, not production. I find the idea as inspiring as ever.

Li Way Lee

Chapter 3. The Owner’s Mind

Abstract

In proportion to the degree of separation from managers, owners agonize over a question: How competent is the manager? This question and the many attempts to answer it have given rise to the field of corporate governance or “the agency problem.” In this chapter I make the case that the most popular heuristic for judging a manager’s competency is market share. As a measure of dominance, market share has claimed the crown. All managers know it and they waste no time in pursuing it. That is why empire building has become the singular obsession among managers today.

Li Way Lee

Chapter 4. The Manager’s Mind

Abstract

Market share is the most popular measure of corporate dominance. For evidence, look no farther than U.S. and European merger guidelines: they are replete with references to market share. To measure market share, we must be able to measure market first. In this chapter I confront the inconvenient truth that anyone’s measure of a market is subjective. Judges in antitrust cases know this conundrum best. (The name is “relevant market.”) I suggest a mental experiment that illuminates the nature of the problem. This experiment—The Magic Mirror—should lie at the very foundation of any theory of industrial organization.

Li Way Lee

The Firm’s Body: The 4 Toos

Frontmatter

Chapter 5. Too Big

Abstract

As managers pursue market share, they find that the boundaries of their markets keep expanding at the same time. They see in The Magic Mirror that they can approach, but never reach, 100% market share. This is the reason why their appetite for growth is insatiable and why their firms become too big. In this chapter, I demonstrate their relentless pursuit of size. I show that managers prefer buying capacity (through mergers and acquisitions) to making capacity (through internal growth). Either way, their firms become big.

Li Way Lee

Chapter 6. Too Complex

Abstract

Big firms are also too complex. One reason is that managers, in their pursuit of market share, grow their firms in all ways possible: horizontally, vertically, and diagonally. Another reason is that complexity can be a trap, like the Prisoners’ Dilemma: Neither firms nor consumers wish to escape from it alone, though they all would be better off if they could escape from it together. We do not know much about “economic complexity”: What it is and how to measure it. I conclude with a call for deeper understanding of complexity in industrial organization.

Li Way Lee

Chapter 7. Too Fragile

Abstract

The urge to build empires makes for fragility. Corporate empires are commonly built on debt, instead of equity. I illustrate fragility by the debt-equity ratio. A firm with a low debt-equity ratio has the shape of a pyramid, while a firm with a high debt-equity ratio has the shape of a Martini glass. Do I need to explain that a Martini glass is more likely to topple than a pyramid during an earthquake? The answer has not escaped central banks. They now administer artificial stress tests on the biggest banks to determine which ones are “too fragile.”

Li Way Lee

Chapter 8. Too Similar

Abstract

Complex firms tend to be similar to each other. For example, many banks offer complex arrays of products and services, and yet the arrays all look similar. You can’t pick out your bank from a lineup by merely looking at what it offers. In this chapter I suggest that similarity does not serve us well. Smallpox spreads faster when we are more similar. Panics and bubbles and chaos thrive when things around us look similar. I illustrate how firms become similar—too similar, rather—when managers pursue market share.

Li Way Lee

Epidemics

Frontmatter

Chapter 9. Waves

Abstract

Mergers tend to come in waves. A wave begins with one merger, which triggers a few other mergers, which trigger still more other mergers. I illustrate how mergers and acquisitions in a market can spread like a wild fire. I also comment on the good, the bad, and the ugly that are left in the wake of a merger wave. All these implications are derived from the assumption that managers pursue dominance, rather than someone else’s interest such as profit or stock price. It is surprising how far-reaching the implications are.

Li Way Lee

Chapter 10. Bubbles

Abstract

In this chapter I suggest that markets in which firms are complex and yet similar are prone to bubbles. Facing similarity and complexity, we tend to make decision by the herding heuristic. Managers are aware of our tendency to herd, and they frame their products and services accordingly. That is to say, managers try to make bubbles. I illustrate this argument. I also draw parallels between a bubble and a Ponzi scheme. They are pretty striking. Before closing I wonder if bubbles have any redeeming virtue when firms are too big, too complex, too fragile, and too similar. I manage to discover some.

Li Way Lee

Chapter 11. Chaos

Abstract

We avoid talking about chaos as if every chaos means the end of life as we know it. In fact, most chaos are local and ephemeral and non-fatal. In this chapter I show that chaos may come from something as simple as big firm managers’ appetite for market share. I will also show that chaos may go just as quickly as they come. The theme that runs through my story is that chaos thrives on complexity and similarity. Given that firms are prone to these bodily excesses, chaos is here to stay.

Li Way Lee

Antibodies

Frontmatter

Chapter 12. Raiders

Abstract

Corporate raiders go after firms that show the 4 Toos: big, complex, fragile, and similar. Raiders’ mantra is: Undo these empires! They believe that the sum of the values of the parts of a corporate empire is greater than the value of the whole. I review both attack tactics and defense tactics in the battle between raiders and managers. Later in the chapter I introduce a simple model of how raiders search and pursue targets. I demonstrate that the model makes intuitively plausible predictions. I have learned to stop worrying that much about firms and to begin loving raiders. The chapter gives corporate raiders a lift to their rightful place in capitalism.

Li Way Lee

Chapter 13. Trustbusters

Abstract

Antitrust agencies patrol the main streets and the back alleys of industries in search of violations of antitrust laws. I review the two main forms of antitrust violation: structural and behavioral. In the second half of the chapter, I turn to tactics that managers use to evade and thwart antitrust agents. The tactics belong to four categories: structural, behavioral, legal, and “capturing.” Before closing, I suggest that trustbusters and managers always have the option of changing the game that they play: stop fighting and go for arbitration. That is, they may seek regulation instead. This suggests that antitrust and regulation are two sides of the same coin.

Li Way Lee

Chapter 14. Creative Destructors

Abstract

Creative destructors are firms that create new taste, new products, new technologies, and new organizations; meanwhile, they destroy old taste, old products, old technologies, and old organizations. (The popular name for them today is “disruptors.”) In this chapter I ask how creative destructors change market shape, market size, and dominance. I build a simple model of “the perennial gale of creative destruction.” The model shows that creative destruction can promote welfare at a point in time as well as over time. That is to say, static efficiency and dynamic efficiency are compatible: there is no tradeoff between them. No apologies are necessary by anyone.

Li Way Lee

Backmatter

Titel: Industrial Organization
verfasst von: Prof. Li Way Lee
Verlag: Springer International Publishing
Electronic ISBN: 978-3-030-26237-2
Print ISBN: 978-3-030-26236-5
DOI: https://doi.org/10.1007/978-3-030-26237-2