BOOK REVIEWS
Competition, commitment, and welfare. By KOTARO SUZUMURA. Oxford and New York: Oxford University Press, Clarendon Press, 1995. Pp. xii, 281. $55.00.ISBN 0-19-828914-6. JEL 95-1647
Oligopoly is a tangled subject, full of special cases and ungeneralizable results. It has long caused grief to dissertation advisors trying to dissuade students from spending years on trivial extensions, and to referees reading the extensions that get past the advisors' filter. Yet oligopoly is deeply important, and is a particularly appropriate topic for a book such as this, which can cover more cases and offer more synthesis than journal editors permit.
Suzumura has two themes: the number of firms under free entry, and the amount of cost-reducing R&D. He uses a homogeneous-good Cournot model throughout, moving methodically from a fixed number of firms to free entry, and comparing laissez-faire equilibria with two kinds of social optima depending on whether the government controls output or entry. He pays attention to details such as the integer problem, general equilibrium effects, alternative government policy instruments, and heterogeneous cost functions.
Whether the number of firms is excessive under laissez-faire is an old and important question that has no definite answer when goods are heterogeneous--the case of monopolistic competition--but does have an answer here. Too many firms enter. Suzumura assumes that firms incur a fixed cost and that marginal cost curves slope upward, quite general assumptions, though, oddly enough, the author rules out the usual specification of constant marginal cost. The social tradeoff in adding an entrant is between a lower price, which reduces the triangle loss, and the new fixed cost. The triangle is second-order, the cost, first-order, and so there is too much entry.
The second theme is cost-reducing R&D. Here, the model assumes a fiat marginal cost curve, and R&D in a first period that reduces the cost level in the second period. The social tradeoffs are complicated, because the researching firm imposes positive and negative pecuniary externalities on consumers and competitors, but Suzumura finds a tendency toward excessive R&D and entry.
The models used are more general than most oligopoly models, but inevitably have their own limitations. An explicit limitation which turns out not to matter is that equilibria are symmetric, involving identical behavior by identical firms. This is not innocuous in a strategic context, as we know from the battle of the sexes or wars of attrition. It is harmless here, though, because an unnoted by-product of the author's analysis of heterogeneous costs is that the results survive in a homogeneous model even if firms are not constrained to behave alike.
A more serious problem is dependence on the Cournot model. The Cournot model is useful because we think that the market price ought to fall with the number of firms and lie between the monopoly and perfectly competitive levels. Cournot behavior generates that outcome in a simple way. In dealing with finer points such as the optimality of laissez-faire, however, one does not want to press Cournot too far. The crucial question, which are begged by the Cournot model, is how much the price falls with more firms and lower costs. The flat marginal cost curves assumed in the R&D models are important for the same reason. If R&D could twist down the marginal cost curve nonuniformly, then its effect on even the Cournot price would be much harder to generalize. Clear results would probably not exist. Some analysis of this would have been more useful than the chapter extending the model from partial to general equilibrium.
One worries about robustness in this context because the mathematical theorems are actually relevant to policy. Governments decry excessive competition and try to restrict entry, though at the same time they encourage R&D. Economists in theoretical industrial organization nowadays are properly hesitant about making policy recommendations, because even without the complications of government incentives, the effects of policies on social welfare often go in both directions. Consequently, we often avoid linking our models to reality.
Suzumura has taken the better path of trying to talk about policy as well as theory, and his book includes excellent discussions of anticompetitive laws and collaborative R&D in Japan in all their institutional detail. He is fully aware that whatever the social merits of entry restriction, in practice the policy is most likely to be motivated by the self-interest of incumbent firms and politicians.
Even if the government is benevolent, there remains, as Suzumura points out, the problem of Hayekian information aggregation. Laissez-faire allows entry of firms with lower costs, whereas the book's model of try with heterogeneous costs assumes that entrants are equally likely in all cost categories. This may be a fertile area for future research, both empirical and theoretical.
My criticisms are the standard ones, and perhaps the best is the enemy of the good. This book's modeling provides a rigorous benchmark of Cournot firms and ideal government, a foundation on which we may extend our intuition to more general cases, and so scholarly a book is unlikely to be seized upon by unscrupulous rentseekers. Mr. Suzumura is to be commended for a mixture of modeling, case study, and synthesis that is all too rare in industrial organization, and his work should be an inspiration for the rest of us.
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By ERIC RASMUSEN, Indiana University School of Business