哈里森·怀特：市场从哪里来

Where Do Markets Come From? Author(s): Harrison C. White Reviewed work(s): Source: American Journal of Sociology, Vol. 87, No. 3 (Nov., 1981), pp. 517-547 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/2778933 . Accessed: 11/09/2012 01:19 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to American Journal of Sociology. http://www.jstor.org Where Do Markets Come From?' Harrison C. White Harvard University Production markets have two sides: producers are a fully connected clique transacting with buyers as a separate but aggregated clique. Each producer is a distinctive firm with a distinctive product. Each side continually monitors reactions of the other through the medium of a joint social construction, the schedule of terms of trade. Each producer is guided in choice of volume by the tangible outcomes of other producers-not by speculation on hypothetical reactions of buyers to its actions. Each producer acts purely on self-interest based on observed actions of all others, summarized through a feedback process. The summary is the terms-of-trade schedule, which reduces to constant price only in limiting cases. The market emerges as a structure of roles with a differentiated niche for each firm. Explicit formulae-both for firms and for market aggregates-are obtained by comparative-statics methods for one family of assumptions about cost structures and about buyers' evaluations of differentiated prod- ucts. Not just any set of firms can sustain terms of trade with any set of buyers. There prove to be three main kinds of markets, and three sorts of market failure, within a parameter space that is specified in detail. One sort of market (PARADOX) has a Madison Avenue flavor, another is more conventional (GRIND), and a third (CROWDED) is a new form not included in any existing theory of markets. Current American industrial markets are drawn on for 20 illustrations, of which three are presented in some detail. Inequality in firms' market shares (measured by Gini coefficients) is discussed. Why do so many of our industrial markets have but a dozen or so member firms, several of which produce substantial shares of the total output (Scherer 1970; Porter 1980)? It is not enough to cite technological constraints. Why, when even the largest of firms wants to offer a product new to it to the public, does it usually do so by acquiring the persona of a firm I Financial support under grants SOC76-24394, SER76-17502, and SES80-08658 from the National Science Foundation is gratefully acknowledged, as is technical assistance from Holly Grano. E. Raymond Corey, Michael E. Porter, and others at the Harvard Business School generously made available teaching notes and case studies of industries or sets of firms from industries; they bear no responsibility for the interpretations I propose. In this development of earlier technical papers, Ronald L. Breiger, Robert G. Eccles, Eric Leifer, John F. Padgett, Orlando Patterson, and Arthur Stinchcombe contributed ideas and other aid, as did an anonymous referee. Requests for reprints should be sent to Harrison C. White, Department of Sociology, William James Hall 470, Harvard University, Cam- bridge, Massachusetts 02138. ? 1981 by The University of Chicago. All rights reserved 0002-9602/82/8703-0001$01.50 AJS Volume 87 Number 3 517 American Journal of Sociology belonging to an existing market? This astonishing fact seems to be over- looked by existing theory; practitioners and consultants take it for granted (see Salter and Weinhold 1979, pp. 7-16; Steiner 1975, pp. 192, 200). Why do economists accept a theory of firms in markets which denies in principle the most commonly observed situation of firms? Most industrial firms most of the time decide production volume within a range where their unit costs are constant or decrease as volume increases (see Ijiri and Simon 1977, p. 7). I developed some tentative answers to such questions in an earlier tech- nical paper on production markets as induced role structures (White 1981). Here I wish to flesh out the argument and illustrate it by application to a number of current U.S. markets. What I have proposed is embedding economists' neoclassical theory of the firm within a sociological view of markets. Markets are self-reproducing social structures among specific cliques of firms and other actors who evolve roles from observations of each other's behavior. I argue that the key fact is that producers watch each other within a market. Within weeks after Roger Bannister broke the four-minute mile, others were doing so because they defined realities and rewards by watching what other "producers" did, not by guessing and speculating on what the crowds wanted or the judges said. Markets are not defined by a set of buyers, as some of our habits of speech suggest, nor are the producers obsessed with speculations on an amorphous demand. I insist that what a firm does in a market is to watch the competition in terms of observables. In my proposal, markets are social structures in which producers repro- duce their own set of actions; the set confirms as correct each firm's expec- tations of what it hoped was an optimal volume. This view is a special case of "rational expectations" (Muth 1961; for a recent survey, see Kantor [1979]). In this feedback model there is also a self-selection aspect derived from the "signaling theory" of Akerlof (1976), Spence (1974), and others intrigued by notions of "imperfect information." A modest generalization of the notion of price is required: generalized to a market schedule of observed outcomes. These observed outcomes are a set of pairs, one pair for each firm: revenue received for volume shipped. Look at the hypothetical outcome sets in the panels of figure 1. Figure 1A outcomes cannot sustain a market, figure 1B outcomes can. Figure 1C, in which a curve is interpolated through the points of figure 1B, is one way a firm may visualize those outcomes, revenue (W) as a function of volume (y). This schedule must not be confounded with the demand function, a hypothetical construct of economists. This schedule may be perceived in terms of price (revenue/unit), buit it is a volume-dependent price. As will be seen below, this generalization of the conventional notion of price is crucial for my approach. 518 Where Do Markets Come From? wI Revenue Revenue Revenue W(y) Volume Volume y, Volume A. B C FIG. 1.-Outcomes for each firm in a clique. A, Outcomes do not sustain a market. B, Outcomes do sustain a market. C, Market schedule inferred from B; decisions using it sustain it. Because it frames the only hard, tangible evidence available, each firm treats W(y) as its own opportunity set. Obtaining even that mulch informa- tion requires alert inquiry-over luncheons with others in the trade, from trade associations, from one's own customers, and so on. Each firm knows that its product is distinctive, but it also knows the difficulty and risk of assessing one's own distinctiveness (see Corey 1978; Porter 1976). In par- ticular, when the total volume one offers in the market changes, its attrac- tiveness to buyers changes, in ways hard to estimate. No firm can reliably assess relative qualities of other firms, and every firm knows that its position could be affected by choices made by any one or more of its competitors. The market schedule W(y) is a shared social construction incorporating all the interaction effects. Such mutually interlocking confirmations of a unique choice by each producer (fig. 1B) are not possible for any arbitrary collection of producers and any population of buyers. A variety of attributes may distinguish indi- vidual producer firms (product quality, location, plant investment). On the one hand, some of these attributes affect cost structures (e.g., figs. 4 and 7 below) and thus the production level which looks optimum to that firm. On the other hand, some of these attributes influence attractiveness to buyers. A self-confirming market schedule, W(y), is induced here for a clique of products whose cost structures and taste structures can each be ranked by quality. A market is an "act" which can be "got together" only by a set of pro- ducers compatibly arrayed on the qualities which consumers see in them. Quality arrays have recently figured in microeconomics under the rubrics of "hedonic prices" (Terleckyj 1976) and "consumer as producer" (Lancaster 1966, 1979). Nearly 20 years ago Alonso (1964) proposed an array for loca- tions in a city, where distance from the center provides a natural metric 519 American Journal of Sociology for equality but also geometric constraints on areas, his analogue of volumes; more recently Rosen (1974) has generalized this schematization to imperfect competition. Building a market is a conflict-ridden and erratic process with quite a range of outcomes possible in the form of market schedules. The various firms' products will presumably be akin within a market, but we do not as observers impose any a priori cultural or linguistic criterion of similarity. Markets are defined by self-reproducing cliques of firms, and not the other way around. The body of this paper is divided into a section on the general model and a section on applications and results. THE GENERAL MODEL Firms in the market differ from one another, not only in cost structure but also in appreciation of their products by the buyers. These dispersions occupy center stage in my analysis. In this respect I follow the long-standing tradition of economic studies of "imperfect competition" initiated by Chamberlain (see Dixit and Stiglitz 1977; Spence 1976). But that tradition has firms using conjectures on buyer taste to decide their market offers. In contrast, my view, presented above, is that firms decide on the basis of observed positions of all other producers. In my view, firms seek niches in a market in much the same way as organisms seek niches in an ecology. Because each firm is distinctive, they are engaged not in pure competition but in finding and sustaining roles with respect to one another given an environment of discerning buyers. But there is no auctioneer to shape the market; instead, its structure depends on the interlocking of local orders. This leads to the postulate that firms with neighboring cost schedules (amount of variable cost to produce various volumes) must also have, in the eyes of buyers, neighboring schedules of valuation with respect to volume. If the postulate is not satisfied, the nascent market situation, a set of producers with an attendant population of buyers attracted by them, cannot sustain itself: W(y) will not be repro- duced through the self-interested actions of firms, checked by buyers. In an observed market, the producing firms are dispersed in quality of product perceived by buyers as well as in volume produced. By the pos- tulate of the preceding paragraph, neighboring qualities must lead to neighboring volumes of production. In the model each firm is assigned a value on an index of quality, denoted by n; the value assigned is charac- teristic: an attribute which cannot be changed quickly as can the volume of production. The volume of production is denoted by y. The key feature of my approach is this: Firms can observe only volumes and payments, not qualities or their valuations, and they act on the basis of 520 Where Do Markets Come From? these observations, thereby reproducing the observations. My model, however, can predict all these volume choices by different firms because it assumes knowledge of quality, n, for each firm, as well as valuations. (Higher values on this index are defined as higher quality-always as judged by buyers' evaluations.) First I develop the cost and valuation schedules, and then I derive the range of market schedules that may resuilt from a given set of facts. A topology of markets-a two-dimensional array with each point a particular shape of payment schedule-follows as a by-product. The varieties and implications of market failures are then discussed before the second part of this paper: applications and predictions for industrial markets. The central theme proves to be a trade-off between dispersions, an affair of variances rather than the matter of means one might expect from the cliche' of supply equaling demand. The Facts of Cost and Value across Volume and Quality The primitives of my description are two schedules (of cost and of valuation), each given in terms of two dimensions (volume y and quality n). If the facts about a set of firms and buyers cannot be approximated in terms of nested schedules,2 those producers and customers will not be able to sustain a market which reproduces itself as in figure 1. In order to achieve a compre- hensiv~e yet clear inventory, I shall specialize to particular families of power functions to describe possible schedules. The schedule of the firm characterized by n for variable costs of produc- tion is C(y; n) = qyc/nd, with q and c positive . (1) The firm's contribution to buyer valuation is defined as S(y; n) = ryanb, with r, a, and b positive . (2) Intuitively it is clear that a balance must be struck by the market between the trade-off taking place between contribution and cost, with respect to more volume or less volume, on the one hand, and the trade-off between desirability and expense with respect to quality, on the other. Equations 2 Nested means simply that the function describing a schedule defined by one value of the parameter (e.g., n) never crosses the function for another value of the parameter. (The concept, though slippery, is familiar and important in other areas, such as Lorenz distribu- tions; see Schwartz and Winship [1980].) This assumption, as well as the more basic assumption that each empirical schedule can be represented by a perfectly sharp function (see n. 10 below), clearly is more stringent than necessary to obtain the main findings. But to simplify explanation of the theory in these first papers, I make not only these assumptions but also the further assumption that particular Cobb-Douglas (power-law) forms are appropriate for the schedule. Elsewhere I have explored alternative functional forms. 521 American Journal of Sociology (1) and (2) yield the simplest family of schedules that allow these four independent variations of schedule as measured in total dollars and with respect either to physical volume y of production or to its quality n. Figure 2 schematizes the phenomenology underlying these schedules. It explicates equation (1) as the variable cost of producing the volume y chosen by a firm being the product of the volume-sensitive cost and the quality-sensitive expense. Cost must increase with volume so that the exponent c is positive; this exponent gives the proportionate logarithmic rate of increase with volume. Quality, unlike volume, is in the eye of the beholder, here the buyers, and therefore is an exogenous "social fact" confronting the producers; so the exponent d can be either positive or nega- tive. When positive, d describes what I denote below as a PARADOX market in which a producer whose product is liked better finds it less costly to make! There is in figure 2 a parallel rationale for equation (2). By defini- tion, the exponent b for desirability is positive; one could even insist that it be set equal to unity, but I prefer not to constrain the scaling of quality values n for different firms' products in that way (see disctssion of tables 1 and 2 below). On the buyer side there is an asymmetry which is not captured in figure 2. Firms are the active decision makers; each has an independent cost schedule i) Phenomenology of Market Context Dispersions across Firms on Volume (y) of Firms Production on Quality Index (n) S c Contribution of the product Desirability of the product h Valuation increases with volume, as increases with quality as e perceived by the buyers judged by the buyers u Cost of production increases Expense of building in the I Costs as volume increases quality changes(+or-) e with increased quality s Increases With Volume Changes With Quality ii) Parameters--Proportionate (log) Rates a b r c | d iii) The Basic Tradeoffs --Over variation, in product volume Contributin= a/c Cost - c --Over variation in producers' quality Desirability = b/d Expense FIG. 2 522 Where Do Markets Come From? known to itself (at least). Buyers, on the other hand, are lumped together as an aggregate, in a passive role. The aggregate buyer may say "no" to the market entry (volume and price pair) offered by a firm, but it has only this binary choice. This binary decision depends on how the buyers in aggregate evaluate more of one firm's product against less of another's. To simplify the model further, I assume that buyers do not see particular pairs of products in interaction, but only the set of products. In formal terms, the buyers in aggregate value their total array of purchases as V(#) = [2 S(y; n)]" . (3) The symbol V for this valuation is in boldface type to signal that it is an aggregate quantity over the whole market: I adhere to this convention throughout. The symbol # gives the number of firms in the market and hence the number of terms in the summation. Observe that the contribu- tion of one firm's product volume to the total valuation can replace the con- tribution of any other firm. In the special case in which the exponent a is unity, further volume increments from a given firm are neither more highly valued (as they would be with a > 1) nor less highly valued than a begin- ning volume. More decisive is the overall exponent y (gamma) which is usually less than unity; this corresponds to a saturation of taste, for the sum of purchases from all firms in the market, by the given aggregation of buyers as the aggregate volume purchased increases.3 The scale factors q for cost schedules (eq. [1]) and ry for valuation sched- ules (eqq. [2] and [3]) are worth keeping distinct. In the section on applica- tions, changes in these will be interpreted as exogenous shifts in cost and demand imposed on the market. I do not define a distribution of firms over the quality index n, only their number. In this view of markets there are relatively few member firms as producers, as few as a half dozen, and there is no reason to suppose any particular spacing on the quality index among those few: These are best treated as a set of constants to be fitted to the observed producers (as is done in several empirical examples later). Certain special cases bear considerable weight in the past development of theories of markets, a point I develop at length elsewhere (White 1980). Setting the exponent b to zero reduces the market to pure competition: products of different firms are indistinguishable. Perfect competition models assume in addition that there is no taste for sheer diversity on the part of I In this simplified representation (eq. [3]) of aggregate buyer evaluations across products, I follow recent innovations of mic