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    {\bf Review of   COMPETITION, COMMITMENT, AND WELFARE by Kotaro  Suzumura     
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                    March 13, 1996 \\
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                    Eric Rasmusen \\
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\hspace*{20pt}	  	  Indiana University
School of Business, Rm. 456,   
 1309 East 10th Street  
  Bloomington, Indiana, 47405-1701.
  Office: (812) 855-9219.   Fax: 812-855-3354. Internet: Erasmuse@indiana.edu.\\ 
           
 
  
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 Oligopoly is a tangled subject,  full of special cases and ungeneralizable 
results which have long has caused  grief   to  dissertation advisors trying  to 
dissuade enthusiastic   students  from spending years on trivial extensions,     
and to  referees  reading     extensions that get past the advisors' filter.   
Yet oligopoly is   deeply important, and is    particularly appropriate as the 
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 just entry.    He pays 
attention to details such as the integer problem, general equilibrium effects, 
alternative government policy instruments, and   firms with 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  monopolistic competition question--- but does have an answer here. Too 
many firms enter.   Suzumura assumes that firms incur a fixed cost and that  
marginal cost curves slope upwards, quite general  assumptions, though, oddly 
enough,  he does not allow 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 we find that there is too much entry.        
 
  The second theme is cost-reducing R\&D.   Here, the model assumes  a flat 
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 towards excessive   R\&D and entry.  

 The models used are more general than in 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 byproduct 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 be between the monopoly and perfectly 
competitive levels,  and 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 questions, 
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 non-uniformly, 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 they at the same time 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 anti-competitive 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 entry 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  modelling provides a  
rigorous    benchmark of Cournot firms and ideal government  for us to  try to 
extend  our  intuitionto 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  modelling, case study, and synthesis that is all 
too rare in industrial organization, and  his book should be an inspiration for 
the rest of us. 

  
 
   
  REVIEWER: Eric Rasmusen, Indiana University School of Business

800-900 words. 

862 words right now in the text. 


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