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Applied Industrial Organization: Towards a Theory Based Empirical Industrial Organization.

The conflict between abstract, deductive methodology and that of inductive, empirical approaches to research has never disappeared in the field of Industrial Organization. For more than a decade, however, deductive models employing noncooperative game theory have dominated the literature as scholars have sought to better understand the behavior of firms. This book marks a notable departure from the trend. Its focus is on IO as an empirical science. Fifteen papers investigate firm behavior across a broad cross section of industrialized countries: 13 are focused on European countries (Austria, Germany, and the U.K.), one studies Australian firms, and one looks at the U.S. The common "structure-conduct-performance paradigm" and all it implies is eschewed in favor of an explicit empirical approach. A few papers derive empirical implications from theoretical models, but most start with empirical evidence and construct a theory. The editors have organized the book around three topics: 1. the role of innovation on firm behavior (performance); 2. the evolution of market structure; and 3. the determinants of firm performance.

The only American author in the work, F. M. Scherer, leads off the section on the role of innovations with a study that investigates the effects of innovations on productivity growth in the U.S. economy. After examining the evidence of the 70s and 80s, Scherer cautiously asserts that ... "technological innovation does not appear to have lost its power in driving productivity growth forward" [p. 32]. Geroski and Machin, in looking at the performance of U.K. firms across business cycles, conclude that innovating firms are much less sensitive to cyclical shocks than those firms classified as non-innovating, a result hardly surprising but nevertheless reassuring. Hutschenreiter and Leo, Austrian scholars, look at the empirical evidence from their country on the Schumpeterian hypothesis that relates firm size to innovative activity. They cannot confirm that an increase in firm size leads to a more than proportionate increase in innovative activity. A professor from the U.K., Hey, submits a paper to this section that is a methodological critique of contemporary IO studies rather than being an empirical study itself. Impressed with the contributions of experimental economics, he calls for new types of experiments in Industrial Organization. Hey argues that if new light is to be shed on IO subjects, theory-suggesting experiments rather than theory-testing ones must be performed.

The next section on the evolution of market structure is based on recognition of the fact that structure is not a constant. Rather, it is a dynamic process that can change dramatically over time. The four papers in this section, all by German and Austrian authors, are the least appealing of the 15 studies. They try to contrast the static neo-classical models with evolutionary models of firm behavior. These papers bring to mind the efforts of some members of the German Historical School who sought to find laws of the evolutionary process in order to better understand stages of economic development. The results here are not much more satisfying, but the methodological approach of starting with some readily observable facts that are allowed to suggest theoretical models is rather intriguing.

The last section of the book focuses on the determination of firm performance. In recent years a strong challenge has been raised to the erstwhile conventional wisdom that market concentration is consistently the most important determinant of firm profitability. The seven papers here are no exception to that challenge, but most do fine that structure plays some role in influencing profits. A study by a British professor, J. Haskel, discovers, however, that the profits of U.K. firms increased in the late 80s, despite the fact that market concentration declined. He attributes the results to the diminished power of unions, and to a change in the structure of demand. A paper by Weiss on Austrian manufacturing firms concludes that there is no simple relationship between concentration, prices, and profits. The growing internationalization of firms seems to be having an important effect on these relationships which used to be firmer, he asserts. The conclusions to be drawn from Austrian banking are not dissimilar from those in manufacturing. Mooslechner and Schnitzer discover that they get mixed results depending upon whether they use cross-section regressions (non significant) or pooled time-series estimates (significant).

This volume is a valuable contribution to its field, but not because it chronicles new and startling results in the realm of Industrial Organization. It is interesting and, indeed fascinating, because of the diverse methodology employed and because of the unique ways that questions are asked of the data. The studies demonstrate that different approaches to empirical facts can provide new insights that create doubts about traditional ways of thinking. For that reason, this book may be useful in graduate seminar courses in the IO field. The book's weaknesses from the standpoint of American readers are two. First, few of the studies relate to U.S. industry, and second, some of the English expressions are stiff and unfamiliar, perhaps because the authors are not native speakers or the translations are quite difficult to make. Still, the contributions are sound and there is much merit to giving attention to the methodological approaches explored here.

Clair E. Morris U.S. Naval Academy
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Morris, Clair E.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Jul 1, 1996
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