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The Structure and Dynamics of New Zealand Industries.

The Structure and Dynamics of New Zealand Industries, edited by Michael Pickford and Alan Bollard (The Dunmore Press), 1998, 384pp. ISBN 0 86469 320 6.

This book is a set of ten economic case studies of New Zealand industries. Five of these -- red meat, fishing, dairy processing, brewing, sugar refining -- have an agricultural or food connection. There are three examples of what would now be called `network' industries -- freight transport, telecommunications, banking -- and two large examples from the service sector: hospitals and tourism. Together, these cases form a varied and interesting, though not necessarily representative, sample of economic activity in NZ: notable omissions are the whole general manufacturing sector and nearly all of the vast `monopolistic competition' economy of mostly small businesses selling differentiated products (touched on here in the tourism and transport chapters). In total, the ten industries account -- by my count -- for 17% of this country's Gross Domestic Product.

The chapters are up to date as of May 1998. The core of each case study is a structure-conduct-performance (SCP) analysis of the industry, bracketed by an introductory historical section and concluding suggestions for public policy. Although there is some variation in the analytical `bite' of the chapters, they are all well enough written, lucid and informative. The SCP paradigm itself is nicely exposited in the editors' Introduction chapter. The book will be invaluable to students of any of the industries covered, and very useful as a reference work for those with more general interests, and as a case book for courses in Industrial Organisation (IO) economics. I had already purchased the book before receiving my review copy.

I will not here offer a capsule summary of each industry or chapter. Instead, I will use my space to reflect on two broader, related, issues raised by a reading of this book: the value of the SCP analytical framework and the implications of the case studies for evaluating New Zealand's post-1984 economic revolution. In dealing with the first of these I will no doubt underplay the value of having a framework or template -- whatever the `theory' behind it -- simply as an editorial organising device, especially when dealing with a disparate group of industries and contributors.

Structure-Conduct-Performance analysis goes back a long way, and has perhaps by now gone on too long. The idea is to sort the characteristics of firms in their markets as `structure' (what they look like); `conduct' (how they behave), and `performance' (whether we like the results), and then identify causal relations between the categories, with structure as the fundamental exogenous force. For example -- and this is the most popular SCP model, by far -- an industry which is structurally concentrated (dominated by a few large firms) is expected to be thereby able to set prices above marginal costs (exercise market power), which behaviour is believed to lead to inferior performance in terms of misallocated resources (too little produced).

The SCP story took some pretty devastating salvos from Chicago or `freshwater' economists more than twenty years ago. Demsetz in 1973 flatly denied the standard association of high industry profit rates with market power (high prices). High profits were, on the contrary, the sign of efficiency (lower costs) not market power, he claimed, and produced evidence consistent with this. And Oliver Williamson and others reinforced this position with the `New Institutional Economics', which showed how different industrial structures could result from transaction cost-minimising responses to differing informational constraints, with no market power implications.

The response of Industrial Organisation practitioners was to raise their game. The `New Empirical Industrial Economics' applied sophisticated econometric techniques to detailed, often micro-level databases measuring conduct directly (eg, prices), and injections of rigorous game theoretic techniques lead to models in which `structure' and `conduct' are determined together, as an equilibrium solution to the game. As a result, the old SCP paradigm has rather fallen by the wayside. For example, I find that I do not even mention it in my Stage III Industrial Organisation course C it would just be another not very enlightening set of English words for my mostly ESL students to struggle with.

These considerations are particularly pertinent to the New Zealand situation, where massive institutional and policy change has forced many industrial structures to be perhaps at least as flexible as market conduct, and has blurred the distinction between them. For example, the first response of Air New Zealand to trans-Tasman air travel competition from the upstart Kiwi International was to introduce a new airline of their own (Freedom Air) C a structural change. Only later did Air New Zealand and Qantas initiate the price war (conduct change) that ended up getting rid of Kiwi. And is, say, the degree of vertical integration a structural or a conduct variable for an industry? It has elements of both, so that it may not be helpful to force it into a particular category

This leads to the second broad issue raised by the book, which is its implications C as a quite wide ranging set of intensive case studies C for the New Zealand economy, and in particular the effects of our post-1984 `reforms'. It seems that the nature of these has been rather misunderstood. We have perhaps tended to think glibly of the reforms as being in the direction of `more market', meaning more competition C more competitors C basically, a `horizontal' expansion of the domain of markets or competition. There has certainly been some of this going on, but in many of these industries actual on-the-ground competition has been decreasing through consolidation and rationalisation C trucking, banking, hospitals, meat processing, dairy processing C and in others (sugar, brewing) an already tight duopoly or monopoly structure has been successfully preserved in the face of competitive attacks. Even telecommunications, under so-called `light handed regulation', has less competition than it would have had under a plausible mainstream counterfactual involving some regulation of the dominant incumbent's behaviour.

So we have had C perhaps C a trend towards greater concentration, less horizontal competition, which in turn has resulted in changes in the vertical relationships between buyers and sellers that have actually reduced the domain of pure market transactions. Big business doesn't like `thick' markets C where everyone pays the same price because no one buyer or seller is large enough to affect the market C they would rather tailor deals to extract the surplus from each transaction. Concentration and size give firms the strength to break through the crust of thick markets, and scoop out the surplus below, via one-on-one deal making.

Such vertical practices often come cloaked in the rhetoric of `more markets' and `competition', but the reality can be subtly different. Thus we read, in the rather uncritical chapter on Banking, of the introduction of user-pay fees as `another source of competition for banks, with waiving of fees common' (p274). That is, before, everyone paid the same fee (= zero); now some people pay more and some pay nothing. This is not competition in the classical sense. The rent-seeking and transaction costs that have accompanied the new deal-making/surplus-stripping economic environment may (as I have suggested elsewhere) go a long way towards explaining the great mystery of modern New Zealand: the failure of the many well-documented (including the cases in this book) microeconomic improvements in productive efficiency to add up to higher macroeconomic efficiency -- higher economic growth. There are other, complementary, explanations, including Arnold Harberger's idea of the `mushroom model' -- efficiency improvements popping up in a just a few places (which naturally tend to attract attention) in a landscape of generally mediocre performance. Clearly, and more than ever, more research is needed, but this generally worthy book does make a valuable contribution to our understanding.

Tim Hazledine

Auckland University
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Title Annotation:Review
Author:Hazledine, Tim
Publication:New Zealand Economic Papers
Article Type:Book Review
Date:Dec 1, 1998
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