Markets from Networks: Socioeconomic Models of Production available in Paperback, eBook
Markets from Networks: Socioeconomic Models of Production
- ISBN-10:
- 0691120382
- ISBN-13:
- 9780691120386
- Pub. Date:
- 10/24/2004
- Publisher:
- Princeton University Press
- ISBN-10:
- 0691120382
- ISBN-13:
- 9780691120386
- Pub. Date:
- 10/24/2004
- Publisher:
- Princeton University Press
Markets from Networks: Socioeconomic Models of Production
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Overview
White argues that the key to economic action is that producers seek market niches to maximize profit and minimize competition. As they do so, they base production decisions not only on anticipated costs from suppliers and anticipated demand from buyers, but also by looking at their competitors. In fact, White asserts, producers act less in response to actual demand than by anticipating it: they gauge where competitors have found demand and thus determine what they can do that is similar and yet different enough to give themselves a special niche.
Building on these and related insights, White creates new mathematical models of how the economy works and how the interaction of its sectors creates mutual protection from the uncertainties of business. These models provide new ways of accounting for profits, prices, market shares, and other vital economic phenomena. He shows, for example, that prices are determined by the coalescing of local variables rather than set in terms of averages as implied by the ''law'' of supply and demand. The model of ''pure'' competition favored by economics is deficient, he concludes, as it fails to account for the varied circumstances of particular industries.
Throughout, White draws extensively on case studies of American businesses and on recent mathematical and sociological work on networks. Rivaling standard economic theories with its rich empirical grounding, sheer originality, and scholarly rigor, Markets from Networks will resonate in economics and economic sociology for years to come.
Product Details
| ISBN-13: | 9780691120386 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 10/24/2004 |
| Edition description: | New Edition |
| Pages: | 416 |
| Product dimensions: | 6.00(w) x 9.25(h) x (d) |
About the Author
Read an Excerpt
Markets from Networks
Socioeconomic Models of ProductionBy Harrison C. White
Princeton University Press
Harrison C. WhiteAll right reserved.
ISBN: 0691120382
Chapter One
INTRODUCTION
An increasing number of markets are something more than sites for direct transactions between buyers and sellers. These markets are mobilizers of production in networks of continuing flows. Firms continuously and jointly construct their market interface, which provides a measure of shelter from the uncertainties of business. These mobilizer markets induce and adapt flows in production and service, of various sizes and quality, through networks of relations that spread through a production economy.
Producers become individually established in a line of business as together they constitute a recognized industry or some analogous grouping of producers or processors. Having developed specialized facilities and organization, each member firm commits, period after period, to a definite flow of products for placement downstream.
In exactly what does this "production market" consist? Is this joint construction of a market by constituent firms a set of roles among positions? Is this market an integral actor, a chorus, or an agglomeration? Is it an ideal, a figure of speech, or a legal framework that acts as a guide to members? Is the market a by-product of signals that the actors read from each other's actions or from the actions of like markets?
There is also a larger view, in which each market is a by-product of dependencies of its own flows on actions around origin and destination markets. For more than a century, the social sciences have groped through a fog of custom that grew around and with this new institutional system centering on a new species of market.
Each such market coordinates its producer firms in commitments to pumping downstream product flows into which procurements from upstream have been incorporated. This sequence of transformation, controlled by producer commitments, fundamentally distinguishes the production market mechanism from earlier market genres of exchange well theorized by earlier economics. Resulting streams of differentiated goods or services from the market get split among diverse buyers as equally good options: The market discipline centers on product quality.
What is the mechanism by which production markets work, and, equally crucial, how do markets embed among dispersed and heterogeneous networks of relations? The following chapters propose and apply a family of mathematical models in answer. Many varieties of the mechanism are distinguished; therefore the modeling provides usable approximations to confused and shifting realities that are affected by processes and institutions-technological, political, cultural, and social-that lie partly outside the modeling field.
The mechanism is adaptable to variety in upstream and downstream contexts (and a dual form oriented upstream is laid out in chapter 9). These contexts for individual firms and their embedding as a market must also reflect how this particular market as a whole fits in among other markets. In the overlapping evolutions of these markets and firms, common business usages and forms of discourse emerge and spread so that there are some common framings in terms of quality and monetary value, terms in which to express the mechanism and the context.
Each market reproduces itself as a social construction by virtue of some form of signaling within a shared frame of perception among its firms. This frame disciplines producers' strivings to maximize the gap between procurement costs and sales revenue, vis-à-vis buyers who hold out for equally good deals across producers with differentiated outputs. The models have roots in orthodox economic theory but insist on the realities of continuing profitability for firms and of local path dependence. They are models of interactive social constructions being carried out around us.
More concretely, what array of prices do firms maneuver each other into as such a market? The empirical focus for this question will be twentieth-century production markets in the United States. To get at price, one has to examine individual markets, each with particular firms as members, interacting to comprise a line of business reaching across cities and states. One can employ a host of intensive case studies of markets. These range from U.S. light aircraft and the dozen and more in Scottish knitwear (see chapter 4) through worldwide markets for oil tankers (Zannetos 1985), U.S. markets for accounting and advertising services (Han 1995; Baker, Faulkner, and Fisher 1998), markets for the latest products such as personal computers (Bothner 2000a)-and even investment banking (see chapter 12). Also relevant are studies of less glamorous markets-for example, cotton waste for cleaning machine rooms-and markets still traditionally local, such as for concrete blocks. One expects, and the case studies document, widely different levels and sensitivities of market outcomes in volume, quality, and price.
The aim of this book is to penetrate not one but all of these disparate examples, and to view them together across networks. Production markets are flexible and are able to persist because they are constructed in and from widely shared mores. A flexible mechanism can accommodate the intercalations of processes and perceptions in all of them. The model derives from and illustrates a more general theory of social construction, rooted in network, identity, and control and triggered by exposure to the uncertainties in ordinary business.
Network ensembles of such markets constitute ecologies with firm, market, and sector levels. Implications for control properties are derived from and point toward devolutions into other forms, subject to additional institutions of finance and ownership. The array of models offers a basis for prognostications about the broader economy.
In this book, we trace some evolutions of identities in interaction with strategic moves, in order to explore degrees of freedom for entrepreneurial action. These market models presuppose human flexibility and scope in the actors, without which there would be no patterns of generalized exchange. So potentialities of maneuvering and disruption are inherent in the formulation.
A key source for the mechanism mathematics was work by the economist Michael Spence on signaling (see chapter 5). He interpreted each outcome, however, as a profile of control over a population of atomized individuals, whereas here the profile is of a joint interactive construction among a handful of players, which then is embedded in networks of other industries but also is subject to disruption and maneuvering.
This introductory chapter now turns to vignettes, accompanied by historical and theoretical framing, that point up key questions about production markets sketched in following sections. In later chapters, existing standard treatments, largely from economics, will be shown either to overlook these aspects or to merely accommodate them through ad hoc additions to their models. These models, such as pure competition, amount to suppression of markets (chap. 11). This introductory chapter ends with a road map of the rest of the book, following sections introducing motivational, contextual, and network aspects of the market mechanism.
FROM LOCALISM TO GENERALIZED EXCHANGE: AMERICAN VIGNETTES
How do firms establish their outputs in each production market? Which firms are in which markets? How does one market relate to others?
Early on, production was more local and less systemic than in today's production markets. Let's begin with colorful just-so stories as a starting point for contrast with standard treatments. Pittsburgh has had several lives as a center of the production of heavy metals. Early in the twentieth century, fierce competition among rapidly growing iron and steel producers blanketed its steep river valleys with smoke. At the same time a trust blanketed much of the competitive action in the steel market. By midcentury, the smoke had thinned and turned apricot-hued as advanced steels came in, along with renewed, although cautious, competition. Across Pennsylvania, to the east in the Lehigh Valley, comparable early scenes out of Tolkien's Mordor were transformed in similar ways, as Bethlehem Steel became intimately connected in networks of business with Pittsburgh steel companies. Since then, Pittsburgh, more than Bethlehem, has spawned and regrown in markets around newer technologies and the commercialization of specialized services hitherto done in-house if at all. The trust organization was loosened by these commercial and technological developments as well as by government antitrust actions.
Chandler (1977) gives a broad overview of the history of industries in America, drawing on rich local, regional, and national materials. He describes interrelated massive changes in institutions of credit, information, and transport among cities that accompanied the emergence of large firms and the decline of localism. Inquiry into the mechanism of the accompanying production markets calls for further probes. This whole section could be preceded by still older developments in New England industry, which offer examples of markets constrained through the co-optation of state government by cabals of elite industrialists. The American economy soon grew too large, too fast for such easy derailment of incipient market mechanisms. Such interventions are not the focus of this book, but later chapters (especially chapter 12) sketch how they may affect predictions from the market mechanism.
Farther down the river from Pittsburgh lay Cincinnati, another city old by Midwestern standards, with a very different industrial history but a similar concentration of wealth and local power in magnates. Consumer goods, soft and sticky, generated huge receipts in Cincinnati, but receipts mostly direct from wholesalers and retailers. As in Pittsburgh, there was local concentration, but also measured competition developed between these locals, notably Procter and Gamble, and parallel consumer-goods giants elsewhere. Minneapolis was similar but larger and more diverse than Cincinnati, embracing packaged foods, lumber, office supplies, and more, again in a mixture of competition and elite control.
By the 1920s Pittsburgh Plate Glass (PPG) had emerged along with production market mechanisms for glass industries, with Owens Illinois (initially Owens Bottle) as one peer, located further west. During the genesis of PPG, several clusters of small local producers across Ohio and Pennsylvania were struggling with confusing, yet appealing, new circumstances in which one could ship to-and even buy from-remote localities and new sorts of industry downstream in production flows. From well before the 1920s, Corning Glass in upstate New York was developing more sophisticated products and methods in glass, protected by patents. And still other clusters across the nation became involved.
PPG came to see that Corning was selling more higher-end glass products to customers no longer committed by relative closeness to upstate New York, just as PPG and Owens Illinois were coming to sell huge amounts of average glass products for buildings in booming metropolises, even metropolises nearer to Corning's plants. It was under such pulls that congeries of small, traditional, local glass producers, not just in Ohio-and not just in glass-either disappeared from major commerce or folded into one or another among the producers with size sufficient to seek niches as peers in a national market. The law of large numbers helped ensure that there was indeed demand for regularly repeated outputs from an industry differentiated enough to cater across an array of buyers.
Enter the transposable genus of production market that is central to this book. The focus is on one theme in these just-so stories: changes in structures of visibility, and thence influence, among actors in networks of business relations common across a production economy. The heart of the claim is that producers' attention was pulled away from habitual ties to local suppliers and distributors, whether in Pittsburgh or Minneapolis. Producers' horizon of opportunity opened up; they paid attention to a much larger and more diverse set of connections. In this enlarged world, producers became aware of a much greater range of contingencies and were exposed to more and more intricate influences that were harder to assess by habitual rules of thumb or by focus on a few predominant ties. This was especially true with respect to buyers. Even the largest buyer (perhaps some wholesaler or large building developer, in the case of glass) did not loom large on a national canvas. Markets in very different products came to be akin in mechanism, a mechanism transposable because adaptable to a great many diverse contexts-though by no means all, as we shall see in chapters 3 and 4.
The lure of market formation often was the prospect of gaining increasing returns to scale, which thus must be a main option in any believable modeling of the market mechanism, pace orthodox economics. The irony is that with such larger reach, the distinctive new signaling mechanism of this market was feasible only among a limited number of producers. So long as producers watched each other for cues and clues as each adapted its products for a niche, they could count on continuing in lines of business together as an industry.
Many other industries necessarily were getting together in the same period. A partition into markets imposed itself among networks of flows among firms. Tracing an industry within this interacting array of evolutions could permit us to estimate also the fungibility of products from different industries somewhat parallel in the underlying networks, such as, in the case of glass, translucent sheets or ceramic pots.
The long-term outcome was a production economy with networks of intermediate products and services. This supplanted more episodic economies among localities with self-contained producers and final consumers, mediated only by merchants of various sorts. But, like the system it supplanted, the production market could also routinely generate net profits for many or all producers. Chapter 15 develops this historical sketch further.
Figure 1.1 is a schematic rendering around one industry of flows and nodes in the new system. It is aptly characterized as generalized exchange because final uses usually require acquisitions originating from many sources through many steps of intermediate processing and service. Here, complementary flows of money and thus a complementary fiscal system are assumed, but anthropology and sociology offer many examples of generalized exchange, such as in kinship systems, that do not require money.
PRODUCTION COMMITMENTS AND KNIGHTIAN UNCERTAINTY
The basic distinction intrinsic to every market in a production economy is between upstream and downstream. This distinction is introduced often in economic theories and business analyses, but casually and without considering the necessary implications.
Continues...
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Table of Contents
List of Figures ix
List of tables xi
Preface xiii
Acknowledgments xv
1. Introduction 1
PART ONE: FIRMS EMBED INTO A MARKET
2. Profiles for a Market 27
3. Market plane 49
4. Quality and Unraveling 78
5. Signaling and PARADOX 95
PART TWO: MARKETS COMPETE, TOO
6. Substitutability Extended 121
7. Market Space 139
8. Estimating Qualities and Parameters 158
PART THREE: MARKETS ALONG NETWORKS
9. Facing Upstream or Down 177
10. Embed and Decouple 200
11. Suppressing Market Realities 221
PART FOUR: MARKETS AND FIRMS OVER TIME
12. Investing across markets 245
13. Strategic Moves and Market Evolution 266
14. Contrasting Research Perspectives 284
15. Business Cultures 299
16. Conclusion 317
Appendix. On Computations 331
Glossary of Symbols 339
Notes 342
References 353
Index 381
What People are Saying About This
A tour de force in the new economic sociology. Markets from Networks develops and applies an innovative and realistic theory of production markets that encompasses a broad array of economic phenomena. It is breathtaking both in its comprehensiveness and its modeling generality. And it is a masterful combination of theory, modeling, and an interpretive approach. This book is a major breakthrough.
— Wayne Baker, University of Michigan Business School
Any book by Harrison White is necessarily an important book. This is no different. He is one of the most creative and inspiring scholars in the field.
— Joel Podolny, Stanford University
"A tour de force in the new economic sociology. Markets from Networks develops and applies an innovative and realistic theory of production markets that encompasses a broad array of economic phenomena. It is breathtaking both in its comprehensiveness and its modeling generality. And it is a masterful combination of theory, modeling, and an interpretive approach. This book is a major breakthrough."—Wayne Baker, University of Michigan Business School"Any book by Harrison White is necessarily an important book. This is no different. He is one of the most creative and inspiring scholars in the field."—Joel Podolny, Stanford University