De Onde Vem Os Mercados

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: 13/03/2013 13:36
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Where Do Markets Come From?'

Harrison C. White HarvardUniversity
Production markets have two sides: producers are a fully connected withbuyersas a separatebut aggregated clique transacting clique. is a distinctive witha distinctive Each producer firm product.Each of the otherthrough the medium side continually monitors reactions of a joint social construction, the scheduleof termsof trade. Each is guidedin choiceof volumeby the tangibleoutcomesof producer reactionsof otherproducers-notby speculationon hypothetical on self-interest based to its actions.Each producer actspurely buyers on observedactionsof all others,summarized through a feedback is the terms-of-trade whichreduces process.The summary schedule, to constant price only in limiting cases. The marketemerges as a of roleswitha differentiated structure nicheforeach firm. Explicit formulae-bothforfirms and formarketaggregates-areobtained of assumptions forone family about by comparative-statics methods of differentiated cost structures and about buyers'evaluations prodoftradewithanyset ucts.Not just anyset offirms can sustainterms ofbuyers. and three Thereproveto be threemainkindsof markets, in sortsof market within a parameter failure, space that is specified detail.One sortofmarket (PARADOX) has a MadisonAvenueflavor, is moreconventional another (GRIND), and a third(CROWDED) is a newform notincluded in anyexisting theory ofmarkets. Current of American industrial marketsare drawn on for 20 illustrations, in somedetail.Inequality market whichthree are presented in firms' is discussed. shares(measured by Ginicoefficients) markets have but a dozenor so member Whydo so manyofourindustrial several of whichproduce substantialshares of the total output firms, tocitetechnological constraints. (Scherer 1970;Porter 1980)?It is notenough of firms a product wantsto offer new to it Why,wheneven the largest to the public,does it usuallydo so by acquiringthe personaof a firm I Financial supportundergrantsSOC76-24394,SER76-17502, and SES80-08658 fromthe as is technicalassistancefrom National Science Foundation is gratefully acknowledged, Holly Grano. E. Raymond Corey,Michael E. Porter,and othersat the Harvard Business School generously made available teachingnotes and case studiesof industries or sets of from firms industries; theybear no responsibility forthe interpretations I propose.In this of earliertechnicalpapers,Ronald L. Breiger, development Robert G. Eccles, Eric Leifer, JohnF. Padgett,OrlandoPatterson, and Arthur Stinchcombe contributed ideas and other aid, as did an anonymousreferee. Requests for reprints should be sent to Harrison C. CamWhite, Departmentof Sociology,William James Hall 470, Harvard University, bridge,Massachusetts02138. ?
1981 by The University of Chicago. All rightsreserved 0002-9602/82/8703-0001$01.50
AJS Volume87 Number3
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American Journal of Sociology to an existing This astonishing belonging market? factseemsto be overlookedby existing theory; practitioners and consultants takeit forgranted (see Salterand Weinhold 1979,pp. 7-16; Steiner 1975,pp. 192,200). offirms in markets Whydo economists accepta theory whichdeniesin principle the mostcommonly observed of firms? situation Most industrial mostofthetimedecideproduction firms volumewithin a rangewhere their unitcostsare constant or decreaseas volumeincreases (see Ijiri and Simon 1977,p. 7). I developed to suchquestions sometentative answers in an earlier technicalpaperon production markets as induced rolestructures (White1981). Here I wishto flesh out the argument and illustrate it by application to a ofcurrent number U.S. markets. What I have proposedis embedding economists' of neoclassical theory thefirm within a sociological viewofmarkets. Marketsare self-reproducing socialstructures among specific cliquesoffirms and other actorswhoevolve of each other's rolesfrom observations behavior. I arguethatthekeyfact is that producers watch each otherwithina market.Withinweeksafter brokethe four-minute RogerBannister mile,others weredoingso because theydefined and rewards realities by watching whatother "producers" did, notby guessing on whatthe crowds and speculating wantedor thejudges said. Marketsare not defined as someof our habitsof by a set of buyers, nor are the producers obsessedwithspeculations on an speech suggest, is to watch demand.I insistthatwhata firm does in a market amorphous ofobservables. in terms thecompetition in which In myproposal, markets are social structures producers reproownset ofactions;theset confirms as correct each firm's duce their expecofwhatit hopedwas an optimal tations volume.This viewis a specialcase of "rationalexpectations" (Muth 1961; fora recentsurvey,see Kantor modelthereis also a self-selection [1979]).In thisfeedback aspectderived from the "signaling theory"of Akerlof (1976), Spence (1974), and others of "imperfect information." intrigued by notions of thenotionofpriceis required: to A modest generalization generalized a market These observedoutcomes are a scheduleof observedoutcomes. revenue forvolumeshipped. received set of pairs,one pair foreach firm: Look at thehypothetical setsin thepanelsoffigure 1. Figure1A outcome can. Figure1C, in 1B outcomes outcomes cannotsustaina market, figure thepointsoffigure whicha curveis interpolated through 1B, is one way a of volume revenue(W) as a function firm may visualizethoseoutcomes, withthe demandfunction, a (y). This schedulemustnot be confounded This schedulemay be perceived in of economists. construct hypothetical it is a volume-dependent buit of price(revenue/unit), terms price.As will of the conventional notionof price is be seen below,this generalization crucialformyapproach. 518
WhereDo MarketsCome From?

Revenue Revenue wI Revenue
W(y)
Volume A. B
Volume C
y, Volume
in a clique. A, Outcomes do not sustain a market. FIG. 1.-Outcomes for each firm B, Outcomesdo sustaina market.C, Market scheduleinferred from B; decisionsusingit sustainit.
Because it frames the onlyhard,tangibleevidenceavailable,each firm eventhatmulch set. Obtaining informatreatsW(y) as its ownopportunity in the trade,from withothers tionrequires alertinquiry-overluncheons from one's own customers, and so on. Each firm tradeassociations, knows that its productis distinctive, but it also knowsthe difficulty and riskof assessing one's own distinctiveness (see Corey1978; Porter1976). In parits attracin the market ticular, whenthetotalvolumeone offers changes, in wayshardto estimate. to buyers No firm can reliably tiveness changes, ofother knows assessrelative and every firm thatitsposition qualities firms, could be affected by choicesmade by any one or moreof its competitors. The marketscheduleW(y) is a sharedsocial construction incorporating all theinteraction effects. Such mutuallyinterlocking of a unique choice by each confirmations ofproducers collection producer (fig.1B) are notpossibleforany arbitrary of buyers. A varietyof attributes and anypopulation indimaydistinguish vidualproducer firms (product On the quality, location, plantinvestment). 4 and 7 one hand,someof theseattributes coststructures affect (e.g.,figs. below) and thus the production level whichlooks optimum to that firm. to On the otherhand, some of these attributes influence attractiveness buyers.A self-confirming marketschedule,W(y), is inducedhere for a whosecost structures and taste structures can each be clique of products ranked by quality. A marketis an "act" whichcan be "got together" onlyby a set ofproducerscompatibly on the qualitieswhichconsumers arrayed see in them. in microeconomics Qualityarrays have recently of figured undertherubrics "hedonic as producer" prices"(Terleckyj 1976) and "consumer (Lancaster 1966,1979).Nearly20 yearsago Alonso(1964) proposed an arrayforlocationsin a city,wheredistancefrom the center providesa naturalmetric 519
American of Sociology Journal for equality butalso geometric constraints on areas,hisanalogue ofvolumes; more recently Rosen(1974) has generalized thisschematization to imperfect competition. Buildinga market is a conflict-ridden and erratic processwithquite a rangeof outcomes possiblein the form of marketschedules.The various firms' willpresumably products be akinwithin a market, but we do not as observers imposeany a prioricultural or linguistic criterion of similarity. Marketsare defined by self-reproducing cliquesoffirms, and not the other way around. The bodyofthispaperis dividedintoa section on thegeneral modeland a section on applications and results.
THE GENERAL MODEL
Firmsin themarket differ from one another, notonlyin coststructure but of theirproductsby the buyers.These dispersions also in appreciation In thisrespect occupy center I follow stagein myanalysis. thelong-standing traditionof economicstudies of "imperfect competition" initiatedby Chamberlain (see Dixit and Stiglitz 1977; Spence1976). But thattradition on buyertaste to decide theirmarketoffers. has firms usingconjectures In contrast, myview,presented above,is thatfirms decideon thebasis of of all other observed positions producers. In my view, firms seek nichesin a marketin much the same way as is distinctive, organisms Because each firm seek nichesin an ecology. they butin finding notin purecompetition are engaged and sustaining roleswith to one another ofdiscerning But there respect givenan environment buyers. to shape themarket; its structure is no auctioneer instead, dependson the of local orders.This leads to the postulatethat firms interlocking with cost schedules(amountof variable cost to producevarious neighboring volumes)mustalso have, in the eyes of buyers, schedulesof neighboring valuation with respectto volume. If the postulateis not satisfied, the a set ofproducers withan attendant nascentmarket situation, population ofbuyers cannotsustainitself:W(y) willnot be reproattracted by them, theself-interested actionsoffirms, ducedthrough checked by buyers. In an observed the producing firms in qualityof are dispersed market, product perceived by buyersas well as in volumeproduced.By the postulate of the preceding paragraph,neighboring qualities must lead to In the modeleach firm is assigneda volumesof production. neighboring value on an indexof quality,denotedby n; the value assignedis characan attribute whichcannotbe changedquicklyas can the volume teristic: is denoted ofproduction. The volumeofproduction by y. of my approachis this:Firmscan observe The key feature onlyvolumes act on thebasis of and payments, notqualitiesor their and they valuations, 520
WhereDo MarketsCome From? these observations, theobservations. thereby reproducing My model, however, can predictall thesevolumechoicesby different firms because it assumes knowledge ofquality, n, foreach firm, as wellas valuations.(Higher values on thisindexare defined as higher quality-always as judged by buyers' evaluations.) FirstI developthe cost and valuationschedules, and thenI derivethe rangeof marketschedulesthat may resuilt froma given set of facts.A topology ofmarkets-a two-dimensional arraywitheach pointa particular shape of paymentschedule-follows as a by-product. The varietiesand implications of market failures are thendiscussedbeforethe secondpart ofthispaper: applications and predictions forindustrial markets. The central theme provesto be a trade-off an affair between dispersions, of variancesratherthan the matterof meansone mightexpectfrom the ofsupplyequalingdemand. cliche' The Facts of Cost and Value acrossVolumeand Quality ofmydescription The primitives aretwoschedules (ofcostandofvaluation), each givenin terms oftwodimensions (volume y and qualityn). If thefacts about a set offirms and buyerscannotbe approximated in terms ofnested schedules,2 those producers and customerswill not be able to sustaina market which itself as in figure 1. In order to achievea comprereproduces hensiv~e yetclearinventory, I shallspecialize to particular ofpower families to describe functions possibleschedules. The schedule ofthefirm characterized by n forvariablecostsofproductionis . C(y; n) = qyc/nd, with q and c positive (1) The firm's contribution to buyervaluationis defined as
S(y; n) = ryanb, withr, a, and b positive.
(2)
it is clearthata balancemustbe struck Intuitively by themarket between the trade-off takingplace betweencontribution and cost, with respectto morevolumeor less volume,on the one hand, and the trade-off between desirabilityand expense withrespectto quality,on the other.Equations
Nestedmeans simplythat the function describing a scheduledefined by one value of the parameter(e.g., n) never crosses the function foranothervalue of the parameter.(The concept,thoughslippery, is familiar and important in otherareas, such as Lorenz distributions; see Schwartzand Winship [1980].) This assumption,as well as the more basic assumptionthat each empiricalschedulecan be represented by a perfectly sharpfunction (see n. 10 below), clearlyis more stringent than necessaryto obtain the main findings. But to simplify explanationof the theoryin these firstpapers, I make not only these assumptionsbut also the further assumptionthat particularCobb-Douglas (power-law) forms are appropriateforthe schedule. ElsewhereI have exploredalternativefunctional forms.
2
521
of Sociology American Journal family of schedulesthat allow these four (1) and (2) yield the simplest in total dollarsand with variations of scheduleas measured independent to physical or to its qualityn. volumey ofproduction respect either It theseschedules. underlying the phenomenology Figure2 schematizes the volume y explicatesequation (1) as the variable cost of producing costand the chosenby a firm beingthe productof the volume-sensitive expense.Cost must increasewith volume so that the quality-sensitive logarithmic gives the proportionate c is positive;this exponent exponent unlikevolume,is in the eye of the rate of increasewithvolume.Quality, is an exogenous"social fact" beholder, here the buyers,and therefore so theexponent d can be either positiveor negatheproducers; confronting tive. When positive,d describeswhat I denote below as a PARADOX is likedbetter it less costly in which finds a producer whoseproduct market 2 a parallelrationale forequation(2). By definito make!Thereis in figure is positive;one couldeveninsistthatit b fordesirability tion,theexponent not to constrain the scalingof quality but I prefer be set equal to unity, in that way (see disctssionof tables firms' products values n fordifferent 1 and 2 below). in figure is an asymmetry is notcaptured 2. which On thebuyer sidethere costschedule makers; eachhas an independent Firmsare theactivedecision
i)
Context of Market Phenomenology

Dispersions
c h e u I e
s
on Volume (y) of Firms Production Valuation Costs of the product Contribution increases withvolume,as perceived by the buyers Cost of productionincreases as volume increases Increases WithVolume
across Firms on QualityIndex (n)
Desirability of the product increases withquality as judged by the buyers Expense of buildingin the quality changes(+or-) withincreased quality Changes WithQuality
ii)
(log) Rates Parameters--Proportionate
rc
iii)
a
|
b
d
The Basic Tradeoffs --Over variation,in productvolume --Over variation in producers'quality FIG. 2 Contributin= a/c
Cost
Desirability = b/d
Expense
522
WhereDo MarketsCome From? knownto itself (at least). Buyers, on the otherhand,are lumpedtogether as an aggregate, in a passive role.The aggregate buyermay say "no" to themarket entry but it has only (volumeand pricepair) offered by a firm, this binarychoice. This binarydecisiondependson how the buyersin aggregate evaluatemoreofone firm's To product againstless of another's. simplify themodelfurther, I assumethatbuyers do notsee particular pairs of products in interaction, but onlythe set of products. In formal terms, in aggregate thebuyers as value their totalarrayofpurchases V(#)= [2 S(y; n)]" . (3) The symbolV forthisvaluationis in boldface typeto signalthat it is an aggregate quantityover the wholemarket:I adhereto this convention throughout. The symbol#gives the numberof firms in the marketand hencethe number of terms in the summation. Observethat the contributionofonefirm's product volume to thetotalvaluation can replacethe contribution of any otherfirm. In the specialcase in whichthe exponent a is further from a givenfirm unity, volume increments are neither morehighly valued (as theywouldbe witha > 1) norless highly valued thana beginningvolume.More decisiveis the overallexponenty (gamma) whichis to a saturation of taste,forthe usuallyless than unity;this corresponds sumofpurchases in themarket, of from all firms by thegivenaggregation as theaggregate buyers volumepurchased increases.3 The scalefactors q forcostschedules (eq. [1]) and ryforvaluationschedules (eqq. [2] and [3]) are worth on applicakeeping distinct. In thesection in cost and tions,changesin thesewillbe interpreted as exogenous shifts on themarket. demandimposed I do notdefine a distribution offirms over the qualityindexn, onlytheirnumber. In thisview of markets thereare relatively fewmember firms as producers, as fewas a halfdozen,and there is no reasonto supposeany particular spacingon thequalityindexamong thosefew:These are best treatedas a set of constants to be fitted to the observed producers (as is donein severalempirical examples later). Certain specialcases bearconsiderable in thepast development weight of of markets, theories a pointI developat lengthelsewhere (White1980). b to zero reducesthe marketto pure competition: Settingthe exponent ofdifferent products firms areindistinguishable. Perfect competition models assumein additionthatthereis no tasteforsheerdiversity on thepart of
I In thissimplified representation (eq. [3]) of aggregate buyerevaluationsacrossproducts, I followrecentinnovationsof microeconomic theorists(e.g., Spence 1976; Rosen 1974; and see Lancaster 1966). Note that demandsfordifferent productsinteractin thisrepresentationonlybecause y is not unityforthatmarket.Each S function reports propensities towardevaluationbased on thatproduct'sattributes, but onlyin the contextof the other productscan it be incorporated into an actual valuation (V) with monetary dimension. Observethat the contribution, at the margin, to V from is its S times any particularfirm ,Y/V(I-,Y)/-Y
523
American Journal of Sociology buyers-in my termsthe exponent a is set at unity.It is in this highly specializedcontextthat the notionof supply equaling demand became prominent. Belowwe see that,although equilibration ofaggregate amounts and soldis certainly sought it is a secondary ofthemain necessary, outcome issue,which is theterms on which aggregation can be carried out meaningwithdiverse fully products. Supplyand demanddenoteone aspect of the whichshapemarkets, but not thebehaviorally feedback processes relevant thetheoretically one or,therefore, relevant one. and Equilibrium Motivations Schedules Each firm, characterized by its qualityn, choosesits volumeofproduction, its cash flow, is theexcessofmarket which y(n), to maximize receipts over costs. (In this I followneoclassicorthodoxy out-of-pocket and disregard forcognitive thebehaviorist and motivational argument to optimizalimits ofchoices tion.)In equilibrium theframe usedmustbe exactly theobserved in figure 1: theW(y) ofmarket market schedule defined forvolume receipts foreach firm, shipped.4 It is the same frame even though we as observers onquality know justhowfirms differ andthusincostandvaluation schedules. How can this be? It can be onlyif each firm, because of its own cost is led by thesamecommon structure, schedule W(y) to choosea distinctive nichefurthermore nichey(n) ofits own,which satisfies theaggregate buyer as good a buy as any other is offering. thatit constitutes This is producer of a market, whichI shallnowformalize and extend. mydefinition are able to imposeonlya necessary The buyersin aggregate condition to be maximized. their netbenefit their netbenefit (eq. [4])for By definition, ofpurchases, is their totalevaluation the V ofequation(3), less thesumof the sumof W[y(n)]overeach firm. thepayments made to all fi firms, The
A scenariocan help as illustration. Suppose some particularfirm, say Medusa (actual illustration in the market-for-cement name of a firm later) thinksit can commandmore than thisschedule.Suppose Medusa picksa particular volume,yo,at whichit hopes to get a revenueA, whichis largerthan the scheduleamountW(yo)and optimizes Medusa's net schedule lyingabove the W(y) drawn throughobserved return, given its hypothesized marketentries.Suppose yois largerthan y(m), wherey(m) is the (unique) volumewhich optimizesMedusa's net return given the existingW(y) and yet keeps Medusa's offerings in line as no more or less attractiveto buyersthan the otherfirms' offerings. If volume yois actually sold, less than the volumesindicatedfrompreviousmarketresultsfor the are falsified, otherfirms willactuallybe sold by them;so theiroptimization computations and theymustscrambleto readjustby lowering pricesand/orvolumesin searchof a selfschedule.But theneven the W(yo) level scornedby Medusa may not be susconfirming fromthe scramble, so that Medusa's hope for tainedin the loweredscheduleeventuating revenueA need not be validated,and in any case it will perceivea changedsituationand of optimalvolume.More likely,not all theintendedyowill be sold, since a recomputation the pricewas above the pricesustainablefromthe marketschedule,at y(m), and indeed each of the othersto expand a at too higha pricenone at all mightbe sold, stimulating bit to filla perceivedgap. In eitherevent,the W(y) marketschedulewill be unstable. I and focusonlyon what mutualconfiguratherefore suppresssuch transient readjustments in equilibrium. can sustain themselves tionsof volumesand pricesamong firms
I
524
WhereDo MarketsCome From? necessary condition is thateachfirm's y(n) yieldthesameratioofcontributionto V overpayment W[y(n)].Incorporate thisratiointo0 (theta) (see n. 3): S[y(n); n] = OW[y(n)]. (4) The firm indexed by n neednot and does notknowthiscontribution function, S, ofcourse, or evenits ownindexvalue n; in equations(2)-(4) we are stipulating possiblefactualsituations aroundthe marketin orderto see whathappensgiventheway firms behave.Thereis no market mechanism whereby buyerscan coordinate on that particular value of 0 insistence which wouldmaximize theiraggregate netbenefit. It is straightforward computation (White1981,eqq. [8]-[15])to find any schedule W(y) which can sustainitself underthepressures and through the choicesoftheseactorson the twosidesofthemarket. is The result W(y) =
(Ay(bc+ad)lb
k)b/(b+d),
(5)
A subjectto two auxiliary conditions. coefficient sufficiency (The constant is specified belowin eq. [11].) Each producer mustby its choiceofvolume satisfy equation (4), and this determines y(n) in termsof the W(y) of of aggregate belowin the dissection equation(5) (as specified supplyand own goal is to choosethat volumewhich demand).But everyproducer's maximizes cash flow;thisfactyieldsthetwo auxiliary conditions. First, theshapeoftheschedule in equation(5) guarantees onlythateach firm producer of can finda distinctive niche that yieldsit an extremum to be cashflow; the must a second-order condition so, realistic, shape satisfy formaximization, which reduces(White1981,eqq. [16]-[18])to d
Ay(bc+ad)Ib>
>da
(6)
fora givenvolume firm willnotremain in themarket y. Second,a producer unlessits optimalniche(at which W - C, is maximized) in fact cash flow, yieldsa positivecash flowto put towardoverheadcostsand profits. This to a form secondinequality can be reduced one in (6): parallelto the first Ay(bc+ad)Ib > -k . (7) Thepresence ofother constant in terms ofan arbitrary k,notfixed parametersand ratesin thesystem, is thefirst oftwokeyfeatures oftheformula (5) forthe marketequilibrium schedule.We see that the two auxiliary conditions the volumes(the (6) and (7) can be takenas possibly limiting y values) and thustheunderlying fixed attributes (then's) offirms seeking nichesin this market.Or, in some parameter theremay be no settings, volumesand thusno qualityattributes, n values, and thusno firms that can yielda market withsomevalues ofk. Qualitatively, k can equilibrium be seento setthelocation ofthecurvedescribed k leading by W(y),positive 525
American Journal of Sociology to higherpayoff for given volume to the delighted eyes of producers. is one way to thinkof the formation Historical idiosyncrasy of k-as the of a numberof producersjockeyingfor almost accidentalby-product in the presence of the otherproducers' volumeand paymentsustainable offerings. It is also clearthata firm can, by cutting its asking priceforthe samevolume, achieve-if it has anymotiveto-a lowering oftheschedule, a changeofvalue of k in the viable equilibrium in effect schedule.(A firm whichtriesto raise its chargefora givenvolumeabove the established at thattimemaysimply terms-of-trade schedule holding find itself withno indeed[seen. 4 above].) sales at all: sharpdiscipline The second outstanding aspect of the formfor equilibrium market schedule W(y) in equation(5) is themixednatureofits exponent as a (shifted) of volumey. The powerfunction powerfunction form of course, follows, ofpower to describe from ouruse offamilies functions thefactsbothofcost schedulesand of valuation contributions (eqq. [1]-[3]). The interesting ofy neglecting is howthisoverallexponent, question k,namely, exponent= -b c+ bd a, (8)
of on the underlying a balance betweentrade-offs dimensions represents of volumeand of qualityin the costs and valuations.The two trade-offs are (as mentioned interest above) the ratio a/c forvolumedependencies and the ratio b/dforqualityvariations("desir("contribution"/"cost") ability"/"expense"). This viewof industrial insistson and pointsup the social commarkets withtechnical is heavily and engineering which interlaced ponent factsand ofsupplyand demand, withbuyer needs.Insteadofa uniqueequilibration in psychology or deviousschemings and taste,we see a hisby speculators of firms torically shapedstructure rolesamonga stableset ofproducer or, of nichesamonga crowdof competing ifyou prefer, an adaptableecology In eithermetaphor the actorsare makingeffective organisms. decisions of the actionsof theirconfreres. on the basis of tangible observations The fortrading off market is a publicfeedback mechanism divergences among firms and between themand buyers. and TheirVulnerabilities A Topologyof Markets, We can projecton a two-dimensional screen, figure 3, the mutualdistancfrom one another, sincethepreceding sectionshows ingofsortsofmarkets to identify that the two ratios a/c and b/d suffice quantitativeaxes of marketresultsand failures But to identify acrossregions differentiation. about how the set of9 firms we mustbe explicit on thisscreenaccurately Thereis an additional in a market coalesceintostablemarket aggregations. 526
WhereDo MarketsCome From? in eqs. (4) and (5), one vulnerable to disruption in feedback loop implicit ofinequalities the terms (6) and (7). withvolume(a and c) must Figure3 has no lefthalf,sincevariations both be positive.Figure3 has both a top half,withd > 0, and a bottom ofproduction half,withd negative. Positived occurswhencorrelation cost for d In the is and withqualityacrossfirms negative, conversely negative. to avoid confusion: mustbe introduced bottom half,newnotation for d < 0: a = -d. (9) In markets halfoffigure identified by pointsin thebottom 3, theproducer outmorein costsofproducwhosegoodsarelikedbetter is laying bybuyers tion fora givenvolumeof goods. As one mightexpectintuitively, there ones across a provesto be a richer sustainable arrayof market types-and fromthe upperhalfof widerrangeof contexts-thanis trueof markets 3. figure markets "Decreasingreturns to scale" characterize located to the left 3 fora/c = 1 (orjust c < 1 in manytexts)."Increasing ofthelinein figure to scale" are supposed, in economic returns theory (Ijiri and Simon1977,
b Decreasing returns to scale Increasingreturns to scale
PARADOX Costs down as quality up d is positive
Failed r ion
Pure Competition 0
~~~~~~~~ ~~~~~~a/c 1
GRIND
Costs up as quality up d is negative
-\
Failure due to freeloading
CROWDED
Failure due to h XPLOSIVEg
a/c=
FIG. 3.-Trade-offsin cost versusvaluation,across growth in quality (ordinate)and in volume (abscissa).
527
of Sociology Journal American But in myviewofmarket markets. p. 7), to be inconsistent withsustainable so d is negative, are viableas longas theexponent suchmarkets structure, firms. forhigher-quality thatcostis higher in thismodel. can be distinguished failures Threesortsofmarket as selfto markets, inhospitable The only factualcontextsabsolutely in upper right withthe are thoseidentified social structures, supporting 0 (d > negatively correlate 3: increasing to scale and quality returns figure is contexts, there In such production. with cost of eq. [1]) in myconvention, nowhereto "shift"the trial marketschedule,that is, no value of the both conk in equation(5) forW(y) whichwillpermit satisfying constant disstraints (6) and (7). Any positivek yieldsa schedulewhichpermits to tinctiveniches only for producerswho are masochistsattempting the terms value of k so depresses Anynegative minimize theircash flows. are able to achievepositivecash flows.5 thatno firms oftradeto producers sight 3, shouldat first all other partsoffigure All other factualcontexts, at least someequilibrium schedules. Thereis usuallysomevalue of permit (6) and (7).6 bothconstraints k which satisfies may under schedules theseotherwise viable rangesof market However, ofinstability. First,"freeone oftwoforms encounter somecircumstances sightis viable,given whichat first schedule loading"can unravela market results "freeloading" terms, witha wholerangeofqualities.In formal firms allowedby one and kindofoverlapbetween volumeregions thewrong from of theinequality constraints (6) and (7). Returnto thepoint by the other k value,a rangeofy exists foranypositive which in thePARADOX region; firms yet does yieldpositive does not yield optimalnichesforindividual withqualityindicesn in Then it is easy to showthat all firms cash flows. the appropriate rangewouldchoosesome "edge" value ofvolumeas their ("corner") optimumamong possible choices; yet they would not yield valueformoneyto buyers:the ratioS/W wouldbe lessthan0 (see eq. [4]). Thus thatpart of the scheduleovervolume,W(y), will not be sustained; set offirms, different willreemerge but thesameproblem (witha somewhat schedule, a shifted from rangeon the qualityindexn) forthe abbreviated For any value of k, positiveor and in the end it willunravelcompletely. of contexts in figure 3, a region region the lower-left trapezoidal negative, markettheory(Spence 1976), is by existing whichyieldpropermarkets
show how a particularset of firmsand buyers describableby a point in the upper rightwould blow up any trial schedule. Parsimony and the static criteriawhich requiresstating,as in the text,just the allowed structures them; theseare givenin moredetail in White (1976, 1981). But examplesof discriminate scenariosmay help the reader'sintuition:see n. 4 above and the case studies below. 6 In White(1981, table A), I report, of the trade-offs plane, the foreach detailedsubregion exact rangeof k values whichalways yield stable paymentschedules.This range can be in themarket;so thereis interaction ifnotall possiblelevelsofqualityn are present larger betweenrangeof k and rangeof n (workedout in detail in White [1979],pp. 54-57).
6 Innumerablespecificscenarios could
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WhereDo MarketsCome From? to freeloading. That is, iffirms of all possiblequalitylevelsare vulnerable in the wingsseeking to that market, forno one of those possibleentrance contexts can any schedule at all (any k value) yielda sustainable market.7 Second,thereare constraints on viability because of possibleexplosive in the processby whichaggregate feedbackeffects marketsize builds. Feedbackin aggregation can be schematized as W(y) -,y(n) W[y(n)I] V(/, y(n)'s) - W(y) (10)
The ratio0 tiesa market to theaggregate schedule facedby individual firms size of market.This is seen fromthe specification of the constantA in formula (5) forW(y): (b -)c/\1bl bc-aA qr (11)
This is a classicfeedback in which indeterminacy theproduction volumes dependon the height of thepayment schedule, whichto yieldequilibrium mustdependjust so on the actual production volumeschosenby all the The arbitrary shift constant #firms. k,as wellas theratio0 as shownabove, enter thedetermination ofequilibrium volumes y(n) and payments W[y(n)], so thatin general a numerical solution is required. The specialcase of k = 0 yieldsguidance in theform ofexplicit foraggregate formulae sizes,which yieldmarket coefficients 0 andA. Theseformulae (in White1981)showthat the aggregate cash volumeof the market, namely, W, is unbounded when c < ay a/c = (12) so 1/yis markedon figure 3 by a dottedline (sinceit appliesonly fork = 0) and the regionto the rightis markedEXPLOSIVE.8 (In the upperhalfof thefigure, ford > 0, unbounded growth of aggregate volume beginsat a/c = 1, the traditional demarcation of "increasing returns to scale" remarked on above.) In the nextpart of the paper,numerical examplesreporting aggregate
7To put it positively, and in more conventionalterms,a marketcan be sustainedat a point in this regiononly if thereare high barriersto entry(assumingthe initial set of firms set a self-sustainable schedulein motion).Such "metastable"markets, in thislowerleft regionof the factual trade-offs plottedin fig.3, should be sought; testingpresumes not only measuresof a, b, c, and d but also following a putative example over timefor evidenceof barriers. Barrierscan be of manykinds: legal, capital (sunk cost of facilities, establishing distribution, etc.) (Scherer1970; Porter1980). 8 In words:demand is such relativeto costs thateach producercan keep raisinghis choice of volume (and perhapsalso new firms enter) and yet findthat the marketsustains the price he envisioned.My comparativestatics model cannot, of course, capture this unboundedescalationas a process,or the bounding effects whichmustset in. New productswhether color TV in 1965 or hula hoops in the late 1950s-are plausible cases.
529
of Sociology American Journal sizes and marketdistributions will illustrate how viable marketsin one offigure region 3 differ from thoseof another. One final general distinction shouldbe drawnhere.The lowerregion marked CROWDED, just short of the EXPLOSIVE region, has "increasing returns to scale." Such markets are viable becausebuyers have no meansto realizeor organizeto exploit the realization that theyare betterservedthefewer the firms thereare.9 Under these conditions, the aggregate size of the market,W, actually decreases whena newfirm enters and finds a nicheon themarket schedule.
APPLICATIONS
I report three classesofapplications. First,I illustrate in detaileach ofthe viablemarket witha modelof a current three regions U.S. industrial market.'0 Second, I locate a wide varietyof empirical marketswithinmy Finally,I illustrate the concentration implications of mymodel, topology. of Ginicoefficients. via prediction Threespecific markets-thoseforcement, lightaircraft, and disposable ofthethree viablemarket diapers-provide myillustrations regions. 1. Cement. Empirical sources forthisand theothertwoillustrations are givenin table 3 below.Eightfirms dominate the current U.S. market for as a nationalone: # = 8. Theirnames are attachedin cementconsidered 4 to the cost schedules whichI assignto each. (The corresponding figure withhigher theS's ofmymodel, are notshown.)Firms valuation schedules, value schedules, so thatd is negative. also have higher cost schedules My best estimateis that the cementmarketis described by a = .8, b = 1, c = 1, d =-2 (8 2), and y= .7 (withr and q each set to unity).This in figure in themiddleof thetriangle 3 just below market puts thecement 4 is one viable At the top of figure the pure-competition line segment. marketschedule (heavy line). It has k = 0, whichin this equilibrium to freeloading."1 GRIND regionis the lowestvalue of k not vulnerable
9 Whenin factbuyersare highly or totallyconcentrated-e.g.,in purchaseof automobile forthisregionapply, one would expectit wipers-and the rangesof trade-offs windshield discussionsee White [1976, 1978]). to be impossibleto forma market(forfurther 10Cost and value functions, and indexvalues forn, are chosento give the best appearing fit for available data, within the constraintsof the functionalformsassumed earlier. fromand testsof the ratherthan fullydevelopedimplementations These are illustrations would require tests of goodness of fit of the power W(y) model. Full implementation is likelyalso to require forms to cost and otherschedules.Full implementation functions stochastic"fuzz" termsinto all the schedules.Grossman(1975) has sketched introducing of anotherkind of rational expectationstheoryof markets, a Bayesian implementation in sec. 4 stochasticterms(but leaves producersundifferentiated); in whichhe emphasizes like eqq. forCobb-Douglas forms framework one simplified estimation specifies Grossman (1) and (2) above. "Given the range of quality values n whichI reportforthem,none of this set of eight But who knows what obscure regionforfreeloading. firms would be in the temptation local producers mightbe watchingfromthe wings?
530

$ Lone Star Industry Ideal Basic Industry X Gifford-Hill x _><
-
.12 -
MartinMarietta-a , MedusaMarquette >* Univeral Atlas
General Portland-*.-
price firm enters: New equilibrium W(y)
o quality, Low law
Cash flows
Cement
06-
Cost Schedules C(y;n) / /\ Initial Equilibrium CementMarket(GRIND REGION) a=.8; b=1, c=1, d=-2, r=1; q=1, y= 7 k= O
W(y)
eo=978
05
09
FIG. 4.-Market schedulebefore into the cement and afterentryof an additionalfirm market.
Arbitrarily, I have used thatvalue of 0 whichmerely breakseven forthe buyerside.12 Justbelowtheheavylinein figure 4 is a secondmarket theone schedule, whichcould resultif a brandnew firm enteredat low qualityand high volume, as shown(thisis a hypothetical, unnamed The changes suit firm). common sense:each otherfirm loses somevolume,as wellas by definition somemarket share,and losesit in sales as wellas in physical volume-yet the aggregate size of the market, is including ninthfirm, the hypothetical increased. As a testofunderstanding, thereader shouldestablish whathappens to the pricescharged in by the variousexisting firms (see last figure White[1981]). The companion figure 5, for the same industry and the same initial equilibrium schedule, showswhat the new viable marketschedulecould becomeif generalcost level q forcement producers wentup by 20%. In addition, a similar comparative-statics shift of scheduleshowswhatwould happenifconsumer demandr roseby 10%. (In each case thenewschedule remains at thebreak-even 0 value for the newcontext and k remains zero.)13
This is the 0,, or t = 1 case used forcalibration in White (1981), eqq. (22)-(27). A rationale is that cementbuyersare unlikelyto be greatlyinterested in doing optimallywell on theirpurchases,just on getting enoughof the rightstuff. 13 In these illustrations, firms were selected and quality index values (the n's) were assigned so that an orderlytermsof trade schedule would result (productionvolumes or marketshares of revenue were the only given data, in addition to discussionsof the industriesfromwhich a and c were derived). In the absence of completedata, these unfalsifiable selectiveprocessesare unavoidable. Once the firms and qualitv index values have been fixedon the basis of available data, however, predictedeffects of "exogenous" changes (embodiedin r and q) can providean opportunity forfalsification of the theory.
12
531
of Sociology Journal American

$ / \ - 8 firms CementMarket (GRIND Regiona=O,b=c=1; d=-2;-0.7) k=0 t=1
.20--
InitialEquilibrium Schedule W(y)\ New Schedule after consumer demand increaseof 10% (in r) .10New Scheduleafter
20 % increase in
cost level(q) production
.05
.10 Volumey
in cost level (q) and demand FIG. 5.-Impact on marketschedule of exogenousshifts level (r).
to someshown In thismarket from the GRIND region(in sharpcontrast either in in consumer demandmakesverylittledifference, below)theshift is shownas firms firms. Each oftheeight among orin divergences aggregate in schedule so thatoneseesnotonlytheshift a doton eachmarket schedule, in volume chosenby a but also the net shift, afterfeedback, perceived Note that the scheduleof perceivedoffers. fromthe shifted given firm firm's in demand, decreases volumeand price. each increase via thefeedback, is morecounterintuitive illustration 2. Lightaircraft. The second detailed 3 in the CROWDED region;the I choosea locationin figure as a market. is themanufacturing indusI shalluse as an approximation actualindustry but three firms Thereare flying. used forrecreational tryforlightaircraft the number in thismarket minimal (Cessna,Piper,and Beech), currently number forexforthe theory to make sense but also a very convenient findings. hibiting marketschedule, Table 1 reports fourdifferent changesof equilibrium k of for of two the shift and values constant (in each case at the each I can 0 forthat context).Because there are but threefirms, break-even in one table of the numerical values. Cash flow all theseschedules report as wellas theschedules W(y). (W less cost) and priceare included I introduce thisexample. ininterpretation which justfor Thereis a change
532
WhereDo MarketsCome From? in table 1, thephysicalvolumesofproduction In all equilibrium schedules forthethree firms are keptfixed, and fixed at thelevelsactuallyobserved in the light-aircraft marketin 1969. So a changedscheduleis foundby the changedquality indexn foreach firm neededto yieldeach computing the same volumeas before. But it is just the qualityindexn thatis to be ofas an attribute oftheproducer is fixed thought which at leastin thenear of as the searchforthe set of conterm. Hence table 1 shouldbe thought
TABLE 1
MARKET SCHEDULES AND QUALITY LEVELS WHICH YIELD OBSERVED PRODUCTION VOLUMES: LIGHT-AIRCRAFT INDUSTRY, VARIOUS VALUES OF SHIFT CONSTANT k AND OF COST PLUS DEMAND LEVELS k=.5 Proportion Cash Price Flow*
~~~~~~~k=l
y n W Proportion Cash Flow* Price
Context: q =1, r = 1, y= .7
1 1.6 1.9
.613 .538 .503
.4403 .145 .6633 .364 .7576 .442 Oo=1.63
.440 .414 .399
1 1.6 1.9
.487 .388 .350
.3874 .388 .5265 .584 .5777 .645 Oo -1.54
.387 .329 .304
Context:q=1.2, r=1, -y=.7
1 1.6 1.9
.508 .446 .417
.3771 .315 .5800 .501 .6684 .566 Oo= 1.64
.377 .362 .352
1 1.6 1.9
.372 .296 .268
.549 .3069 .4377 .708 .4889 .755 Oo= 1.68
.307 .274 .257
Context:q=1, r=1.2, -y=.7
1 1.6 1.9
.612 .537 .502
.4389 .6614 .7557
Oo= 1.96
.146 .365 .443
.439 .413 .398
1 1.6 1.9
.489 .390 .352
.3895 .5286 .5795

0o=1.84
.386 .582 .643
.389 .330 .305
Context: q =1, r= 1, y=.9
1 1.6 1.9
.926 .7827 (-.095) .812 1.061 .095 .759 1.163 .172 Oo=1.08
.783 .663 .612
1 1.6 1.9
.466 .371 .335
.3666 .408 .5043 .602 .5556 .662 Oo= 1.61
.366 .315 .292
Context: q=1, r=1, -y=.7 (New Firm Added, Third in Size)
1 1.3 1.6 1.9
.552 .518 .485 .453
.3726 .4775 .5739 .6618

Oo=1.81
.181 .306 .404 .482
.373 .367 .359 .348
1 1.3 1.6 1.9
.399 .355 .318 .287
.2979 .3677 .4273 .4783

oo=1.58
466 .578 .655 .712
.298 .282 .267 .252
a = 1 = b, c = .8, d = -2. Go NOTE.-Throughout; is thebreak-even value for0, withthegivenk value (see White[1981], eqq. [20]-[25] fordetails). * {W[y(n)] }-{C(y(n);n] /lWy(n)I.
533
of Sociology Journal American stants and parameter values whichyield the best fit to the currently of changesin volumewould be made only observedmarket;predictions later. In the CROWDED regionof figure 3, marketschedulescan become established onlyiftheyare shifted value ofthe upwardand have a positive in constants shiftconstantk. Regardlessof othershifts and parameters, forlargerk value, producers of lowerqualityare sufficient to obtain the observed volumelevelsy. These volumelevels are associatedwithBeech (smallest, y = 1), Cessna (y = 1.6) and Piper (y = 1.9) in ascending order of size. At the higher k value theseproducers also generate lowerprices but cash flowsalways are a sharply (and therefore sales) in all contexts, ofsales. higher proportion Table 1 shows also that these marketoutcomesare quite insensitive, have playedthemselves afterthe feedback effects out, to changesin level r of demand. But outcomesare extremely sensitiveto changes in the "saturation"rate, the parameter y. Gamma closerto 1 (less saturation) may lead, fora CROWDED region market like this,to muchhigher sales are sharplyreducedin spite of volumes;but cash flowsto the producers higher prices.'4 is modeled on thedisposable-diaper 3. Diapers.A third market industry, a verylargeand quitenewone whichalso nowhas but three in producers, part because of the huge capital costs of the equipment neededto make This industry scale (400 per minute). diaperson an efficient clearly belongs in the paradoxicalcategory favored whichin myframeby Chamberlain, 3: the better-liked workis the upper-left regionin figure diaper actually has smaller variablecostsperunitand thushigher-volume than production one equilibrium market for theless likedbrands.Figure6 reports schedule 4 forthe cement thiscase (plus cost schedules), parallelto figure industry of eightfirms. If, analogousto figure 5, we drewa changedequilibrium schedule(still at k = 0 and at break-even 0) afteran increaseof 20% costs (givenby q), thisschedule in the levelofproduction occurred would be shifted downward uniformly by just under 25%0.A parallel demand new break-even value of 00 = increase(r up by 20% and a corresponding to a magnified 1.497 at k = 0) leads, afterfeedback, and quite uniform is unlike ofnearly in sales; thelatter result thatin figure 5 for increase 40%0 to r. whichwas insensitive the GRIND region market, in theCROWDED region As a parallelto table1 for theaircraft industry in table 2 also the changesin qualitywhichmustbe of figure 3, I report in orderto maintain theirvolumesy at to the threeproducers attributed in the market, forvariouschangesin assumpthe relative levelsobserved to theCROWDED market of tionsaboutcostlevelsand so on. In contrast
14
Yet with -ycloser to unity,in orderto match the observedvolumes,one must assume firms on then index). However, extremely high-quality producers (highvalues forthethree thissame saturationvalue -ycan lead, whenk is large,to loweredsales and higherprofit.
534
WhereDo MarketsCome From? $ A

DISPOSABLE DIAPER MARKET (Paradox Region, a=1, b=1, c=1.2; d=15) Proctor8 Gamble bl 1.50-
C C(y;1.2)
.60-
Johnson8 Johnson
Kimberly Clark 1) C(y, 0
)\
C(y;1.1)
1.00
175 Volume y
FIG. 6.-Production volumedecisionsin the disposable-diaper market,at equilibrium. EquilibriumscheduleW(y): (k = 0; -y= 0.7; Oo= 1.313).
table 1, here the increasein cost level requires thathigher qualitybe atto each producer in orderto predict tributed the same volumes y, and the pricesand sales volumesactuallyare increased as a result,as is the cash flow. 5 fora GRIND market, Againin contrast to table 1, but as in figure is verylittlesensitivity in thedemandlevelr. to changes there LocatingU.S. Industrial Marketsin theTrade-Offs Plane In figure of fig.3)15an abbreviated 7 (whichrepeatsthe topography name indicates theestimated in thetrade-ofls location planeofeach ofa scoreof currentdomesticmarkets.Included are the three (cement,airplanes, sourceused is a businessschoolcase diapers)just analyzed.The primary study serieswith acronymICCH.16 Table 3 gives ICCH identification codesas wellas other sources.
No dotted line at a/c = l/-y is shown because -y (crudely: a measure of aggregate of demand) may be different foreach industry. are that,of the elasticity My impressions 20 cases in fig.7, on carefulmeasurement only color TV sets 1965, optical fiber, Minicomputer1980,and injectorsmightprove to have a/c beyondthe corresponding value of 1/-y (i.e., in the EXPLOSIVE regionoffig.3); and onlythe first two might have values of than unity. -ygreater 16 The ICCH seriesused are but a ofall Intercollegiate smallfraction Case ClearingHouse case studies(Graduate SchoolofBusiness,HarvardUniversity):theseare either deliberate studiesof a wholeindustrial marketor studiesof individualfirms whichcan be combined to yieldgood coverageof a given marketby my definition.
15
535
of Sociology Journal American thatis, in in coding, of an industry in figure 7 is an exercise Placement and on valuations.17Occasionally, on cost structures judgment qualitative data is givenfor numerical industry, systematic equipment as forthefarm can be of parameters estimates ofconcern so that numerical thequantities formainsuchas thoseshown are closeto guesses, made.'8Otherlocations and minicomputers.'9 frame computers
TABLE 2
MARKET SCHEDULES AND QUALITY LEVELS WHICH YIELD THE PRODUCTION VOLUMES (y) OBSERVED IN THE DISPOSABLE-DIAPER INDUSTRY UNDER VARIOUS CONTEXTS, WITH SHIFT CONSTANT
k = -40
y
Proportion Cash Flow
Price
Context:q=1, r= 1, ey=.7
30 100 296
3.33 3.67 4.00
10.38 39.75 128.5
Oo=9.2
.058 .098 .100

=.7
.35 .40 .43
Context:q=1.2, r=1,
30 100 296
3.61 3.98 4.34
11.07 42.11 136.1 Oo=9.44
.219 .249 .250
.37 .42 .45
Context:q = 1, r= 1.2, y=.7
30 100 296
3.32 3.66 4.00
10.38 39.73 128.4 00= 11.05

Context:q=1, r = 1,
-y=.9
.058 .098 .100
.35 .40 .43
30 100 296
1.80 1.98 2.16
27.19 100.2 323.6 O=1. 975
.094 .100 .100
.91 1.00 1.09
a = 1 =b; c = 1.2; d = 1.5. NOTE.-Throughout

17 SiX cases were coded independently by Eric Leifer.In each of these the codingsagreed on region.In the absence of systematicnumericaldata, however,exact agreementon impossible. locationis virtually 18 I.e., thefarm decreaseofcost percentage case studyquotes the proportionate equipment capacitywhichis utilized.Depending of (notional)production withincreasein percentage on the particularcomponentreported,the exponent c lies between 0.7 and 0.9. (See ICCH-9-280-080 [Rev. 2/801,table 5, p. 6.) 19 above rangefrom quite exact codingusingnumeriThe threeillustrative cases presented cal data (disposable diapers) to more qualitative estimates extrapolatedacross firms (cement).
536
TABLE 3
SOURCES AND NOTES FOR TWENTY INDUSTRIES Name (in Fig. 7) and ICCH Identification*
Notes and OtherSources
Drillingmud: 9-380-167 .................. 9-380-168 .................. Vacuum tubes: .Rev. 1-379-184 Watches: .................. 6-373-080 1-374-050 .................. 1-374-051 .................. 9-373-090 .................. Baby foods1965: 1-379-185. Log houses: 1-378-195 ..|.....Firms 1-379-(196-201) 3-378-193 .................. Circuitbreakers: 9-513-152(M230)........... 9-513-151(M229)........... 9-565-004 .................. 9-567-005(AM-P204)....... 9-578-205 .................. Disposable diapers: 9-380-175 ..................
... ... 8/79 } Rev. 10/72 Rev. 10/751 Rev. 10/75 Rev. 9/76 Rev. 8/79
.
to cleansepollutants Marketin vibrators from barite Classic declining industry
Unusually clearcutcase of PARADOX whichrationalizecustomized houses
Rev. Rev. Rev. ... Rev.
10/75' 10/75 1/79 10/78j Smith Barney Harris Upham Research Reports 1979: variousdatest See text.
Oil tankers: 9-379-086 ................. ... Distribution electrical components: 5-379-146 . .. ...... ... ..... 1-377-063 .................. 5-379-146. 3-778-153 f.... ............... . 9-377-041 Rev. 1/79 ..... .......... 9-380-084 ... .................. 9-377-055 ... .................. Strode's cables: 5-377-028 .................. ... 9-376-188 Rev. 11/77k .................. J 9-377-027 .............. ... Cement 1970s..... ... .......... 1895. ......... ... Sugar refining Injectorsplus electronic fuel injection(EFI): 9-378-219 .................. ... 1-378-257 .................. ... Light aircraft: 9-369-007(BP 934R)........ 9-369-008 ..... . .......... 9-370-036 ........ .........
...
Service thatstocktensofthousands f. firms parts o typeso prs
Market in metal-ceramiccable connectors, includes Strode division of EG&G, Inc. Business Week1980 Eichner 1969, chaps. 2, 3 Injectors are a componentof EFI, and a separate market; cases emphasize in these markets role structure Low-cost,recreational plane market
Rev. 1970 ...
* Studies Mass. Field Road, Boston, availablefora feefrom House,Soldiers Intercollegiate Case Clearing studies pica typescript. Most oftheseindustry 02163.(Each mayrunfrom fiveto 25 pagesofsingle-spaced alterdata to concealidentity userealnamesoffirms; firms, and/or some,and mostICCH cases ofindividual protect confidentiality.) in business school unbound. t Available libraries,
Journal of Sociology American

TABLE 3-Continued
Name (in Fig. 7) and ICCH Identification*
Notes and OtherSources
Mainframe computer1980..... 1980. .......... Minicomputer Nickel...................... Tractors1970s: 4-578-083 .................. 9-280-080 .................. 9-171-368(BC 349) ......... 9-313-123(BP 866) ......... 9-313-154(PB 867R) ........ 9-377-704 ... ............ 9-574-858 .................. Color TV: 1-380-180 .................. 1-380-181 .................. 1-380-191 .................. Fiber optics: 1-379-136 .................. 1-379-139 .................. 17. 1-380-1 Some ICCH
... ... Rev. 11/77' Rev. 2/80 ... Rev. 7/69 ...
Coreyand Star 1971,pp. 108-56;Harvard Business Review1980; Fortune 1980 Hayes 1980 Salter and Weinhold1979,chap. 10
...
... ... Rev. 1/80 ...
... Will explode into a clusterof huge new -yexceedsunity markets: in my terms,
thoseindustries demandedby my model and so do not appear,although on the oil tanker be suitableif studiedat another date.20 might Another, to meetthemodelspecifications.2' industry, can be rephrased in manyofthesemarkets do so typically as which The firms participate A separatedivision, whichis an independent centerand divisions. profit
after1963. This is an industry withbut two generators One such is the serieson turbine a pure duopoly whichis not a marketin my sense. Prior to 1963, however,it members, producersjoined was a marketin my sense, one in whichseveral otherU.S. and foreign the two in eyeingone anotherforthe same business.This earlierformI discusselsewhere account (1974, 1975). The late nine(White 1981) on the basis of Sultan's two-volume ably describedby Eichner (1969), also ended as marketin sugar refining, teenth-century ratherthan two. I would code it as having been in the a trust,but withmany members level and (accordingto impurity GRIND regionin 1885: some product differentiation associated taste) but less than the variationin cost among the score of manufacturers around the United States (b < 6). Over the next decade, greatly expanded factories economies of scale (c < 1). The set of producerfirmsbelongs in the yielded striking CROWDED regionfor1895 as shownin fig.7. Then the disappearanceof productdifferup of all firms and the Havemeyers'rounding instability set the stage formarket entiation into a trust. 21 If the volumein thismarket(the decisionvariable, y) is numberof tankertripssupplied market which but a truck-and-barter market is nota production themarket by a charterer, should be referred (withits erraticpricesand speculativefeatures)to the pure theoryof exchange (Newman 1965). But one can reorientto see y as the speed at which given per timeperiod.Figure are senton a journeyand thusthe volumeof oil delivered tankers forwhichthe case studymaterialyieldsquite definite 7 containsa point forthismarket, estimates (c = 2, a < 1, d < 0, 6 >? b, -y< 1). (The existence of such a market as a is, ofcourse,an idealization,givenits heavy dependenceon termsof trade separateentity and suppliesin the spot marketfortankersas well as on the chartermarket.)
20
case study series contradict the specifications (the "givens")
538
WhereDo MarketsCome From? autonomous, is the decision relatively makereyeing the otherproducers.22 connector market labeledStrode'sCable in theceramic-metal For example, in by an independent division ofthelargefirm 7 is thatparticipated figure acquiredearlier by incorporating an old-line calledEG&G (a division firm namedStrode).
Drilling Mud Watches 1
Vacuum
Log
xI
Tubes 1980
b/d
1965
Foods
Baby
Houses
/Failed/
Regio
X<-Circuit Breaker
Disposable Diapers
Distribution 'X*, X Elect Compo. Oil Tankers Strode's trode's
Sugar Refining Sua eiigVolume X 1895
a/c Tradeoff over x
Cable X
~~~~~Injectors
Cement
-1.
>
Light Mainframe Aircraft Aicat X Computer 1980 \ X Nickel Computer X Mini-
1980
ng FreeloadingEF\ Failure
EFI
Tractors 1970s
Color TV Sets X 1955
Optical x Fiber
plane (sourcesin table 3) FIG. 7.-Locations of marketson the trade-offs but these may be financial complications, This fact could add obvious cross-market costs) and not relatedto production.My model should be seen (capital, and long-range model. as a preconglomerate
22
539
American Journal of Sociology The ICCH reportson the baby-food manufacturing industry yield a and welldocumented clear-cut examplein the PARADOX region, to contrastwiththe diapersmarket discussedabove. In the late 1920s Gerber forcannedbaby foodsas decisively as createdand thenled an industry IBM did mainframe computers. Gerber, too,has had precursors and early suchas Mead Johnson's competitors pabulumof 1915and Clapp's canned broth,as well as large competitors whichperishedwithout a trace (e.g., Libby,McNeill,BirdsEye). of Gerber's Mothers wereconvinced enough qualitythatit couldcharge of over 10% while spendingnearly 10% less on total price premiums In 1965 Gerber advertising and promotion. had moremodern and efficient production facilities thanitsmaincompetitors-Beech-Nut, Swift, Heinzin turnweremoreefficient thanthesmaller which brand-name competitors, oftenregional,and the numeroussmall private-label competitors. Yet ofscale werenotsignificant, in partbecausetherewereso many economies foodvarieties (over 100) at a giventimeas wellas a highrate of change ofvarieties, about one-third per decade. ofitemsalso tended on The largevariety to limit concentration bybuyers one company's productssince othercompaniesoffered different varieties to give open that mightcatch taste. For complexreasons (willingness ordiscounts off orrebates, discounts byvolume, invoice, etc.),supermarkets tendedto give Gerber less shelf space thanits market share.And contrary to Gerber'sand the othercompanies'predictions, the birthrate had been declining since the late 1950s, and almost all mothers alreadyused the 'y was well commercial baby foods,so that in 1965 the overallelasticity underunity. The constituent estimates underlying the Baby Food 1965 locationin 7 are a = 0.6, c = 1, b = 1, and d = 0.8.23 These differ figure substantially from thoseforthe diapersmarketgivenabove in table 2. The resulting ofthetrade-offs in location within thesameregion difference plane leads to forotheraspectsof the two markets substantial differences predicted (see forequations). thenextsubsection and theAppendix in MarketShares Inequality arean interrelated setand in thepure Sinceproducers watch producers, they It follows awarefirms. thattherewillnot be case are a cliqueof mutually in a market; therewillbe a dozen or two. Each verymanyfirms probably willtendto be distinct in roleand to have a distinct place on the quality index n. It followsthat the firmwhichby the existing scheduleW(y) have a substantial shareofthemarket, thelargest volumewillitself chooses
schedule W(y) indicates a estimationof the observed terms-of-trade Furthermore, large,negativevalue of the shiftconstantk.
23
540
WhereDo MarketsCome From? firm to which as willthe nextfew.One hazardsa guessthat the smallest the biggestwill lend an eye will be withina factorof 10 in size: thus it is arrayed from follows from mytheory a leaderwitha fifth thata market or moreof the totalsales downto the smallest with1%0or so of the total. But howcan we assessthesefactsin comparison withother sortsofinequal7? orunderstand frame ity, in terms ofthetrade-off ratios them which figure I choosethistopicofmarket for ofmarkets shares illustrating myanalysis and one of the becauseit seemsto me at once one of the mostimportant ofproduction mostvexedaspectsofthepresent socialscience understanding markets(Scherer1970; Porter 1980). Observedmarketsalmost entirely escapethecomputational microeconomic graspofexisting theory (Mansfield of devicesthe theory 1975; Cohenand Cyert1975),although by a variety is observed and whatever to be in harmony. are declared Law, in particular to antitrust than does seems the more law, shape microeconomic concepts theory (Williamson [1975];fora goodsurvey see thelast ICCH studycited forcircuit breakers in table3, and fordocumentation ofantitrust policysee Salterand Weinhold held [1979], pp. 289-305). The shareof total market is givenprimafacie by the top four(or 3 or 5 or 8.. .) producer firms as evidencefordegreeof collusion in pricefixing standing and so on. In I think ofmarket assessment sharedistribution should(i) be made contrast, on the basis of an explicit of market theory formation and (ii) be assessed in a moregeneral comparative framework forthestudyofsocialinequality. This second objectiverequireslookingat firms as social actors; it also calls fora measureof inequality widelyused in social science, such as the Giniindex. Variousdegreesof inequalityamongproducers in theirmarketshares yield quite different sorts of roles forfirms, as well as different overall For example, atmosphere. does thelargest firm overwhelm the others with its presence, or does the traditional Englishindustrial flavor prevail,with firms notvarying greatly in size "sharing up" themarket in genteel fashion? (Dispersion in profit rates,etc.,also are important, but theyare influenced inpartby factson fixed investments and thelike,which mymodelignores.) To achieve a simpleformula, I shall further restrict myself to market withk = 0.24 In thisspecialcase theinequality schedules in cashflow equals theinequality in market volumes, to whichI nowturn. The Gini indexis familiar as a measureof inequality or dispersion in personalincomesor wealth: it is derivedfromLorenz distributions for cumulativepercentage of total incomeversus cumulative percentage of population (see Schwartz and Winship 1980).It is suitable as wellfor market volumes (see Granovetter [in press] for generaltheoretical discussion).
24
They are known to be stable in all subregionsof fig.3 except the upper portionof CROWDED; i.e., exceptfor 1/1y > a/c > 1, and a/c > b/6.
541
of Sociology Journal American This index,call it G, variesbetween zero (forequality)and one (fortotal inequality). As calibration: fora uniform distribution overincome the Gini is 0.33; typicalnationalincomedistributions have G = 0.4, and national wealthdistributions mayhave G = 0.8. 8 shows howthevalueofG predicted for Figure salesvolumes ofa market in thetrade-offs to location tendsto changeaccording plane. Its limitation of firms is that the qualitiesand number mustbe kept the same,forthis purpose;so thevariouspredictions cannotbe checkedindividually against of observedmarketssuch as figure values computed across an assembly 7.25 The main assumption is that all firms in any givenmarket are spaced
b/d .48 .58 .67 .82 .5 .6 .71 .84 (
_ __
1--
.53 .64 .75 .87 .57 .69 .80 .90
More Equality
.2 .5 .71 .87 .33 .82 .67 .43
a/c
.33
.5
.27
.06
From eq (14): uniform distribution of firmsacross all n (O<n<O), and with k=O. FIG. 8.-Gini index scores for inequality in sales among producers (fromeq. [14]: uniform of firms across all n [O < n < oo], and withk = 0). distribution
26
indices computedfrom In any event thereare many practicalproblemsin comparing in fig. in the businesspresswith the projections ICCH case studiesor fromobservations themselves in a marketas reported may not be that seen by the producers 8. Membership (forSIC codes see Shiskinand (as my model stipulates):First,variousfederaldefinitions
542
WhereDo MarketsCome From? on the qualityindexn. For mathematical the lower uniformly simplicity n are takento be zeroand infinity, limit and theupperlimit oftherange for and firms respectively, are assumedto be verycloselyspaced on quality. The general formulae forG undertheseassumptions k = 0) are: (including for physical volume(y), G fordollarvolume(W), G 1+ 2(c-1 bc + ad Note thatmarkets lies (d>> close to the axis where perfect competition b) tendto have highinequality on sales or on physical either volume.Also, inequality decreases by either equationas one movesaway from valuation to cost changewithvolume(i.e., changewithvolumebeingproportional as one movesaway from into GRIND and the a/c = 1 vertical),whether PARADOX regions on theone side or intothe CROWDED region on the other.(The equations do notholdforIb/d k where I < a/c in thelatter, 0 is not a stableschedule.) By inspection of equation(13) one can see that equal physicalvolumes are approached and negative. In the whenthequalitytrade-off b/dis unity bottomof figure 8 (d < 0), whenthe two trade-off ratios are equal, but in sign,equality opposite in sales volumesamongproducers is approached. But it is precisely alongthisline that market structure disintegrates just and value trade-off becauseit relieson divergences between cost trade-off to cue distinctive nichesforfirms.
CONCLUSIONS
1+
2(c -)
(13)~~ (13)
(14)
Marketsare tangiblecliques of producers observing each other.Pressure from the buyerside createsa mirror in whichproducers see themselves,
Peterson[1972])may yieldno statistical"industry"or "product" at all close; yet business journals usually reportdata in termsof government definitions. Second, the numerical levels of Gini indicesformarketsales came froma stylizedpower-law framework forcost and valuation; they do not make accountants' discriminations. Third, most reportsof businessperformance use the legal corporation as unit,but typicalFortune 500 firms can have dozens of divisions, whichas mentioned above, are commonly the effective actors in the actual marketsI model. Reinforcing biases will tend to make predictedvalues higher than observed values. Eq. (14) assumes an infinite range and uniform distribution for qualityn and so shouldtendto exaggerate inequality;it also assumesa scheduledescribed by a shiftindex k of zero. Empiricalestimatesusually come fromtruncatedsets of firms with the smallestomittedand so will tend to underestimate inequality.I see no reason whyeitherof thesereinforcing biases should be correlated withthe size of G, so the rank orderof predicted indicesshould tend to be the same as that forobservedindices.
543
of Sociology American Journal not consumers. Heterogeneous producers withtheir differentiated products mayfind and maintain stablerolesor niches.Self-interested optimizing by each of themcan sustaina globalmarket scheduleW(y), but it is exposed to threesortsof market failure. Basic limits forequilibrium configurations turnout to dependon just two trade-off ratioswhichsummarize the facts of costs and tastes. Thus marketsare shaped by trade-offs betweendisnot by averagesas suggested persions, by the clichethat supplyequals demand.
APPENDIX
Changesin Cost Level and ProductPopularity Two different kindsofsensitivity ofthemarket as a wholeto an exogenous change(see fig.5), such as an increasein q or r, shouldbe distinguished. on the marketscheduleW(y) of figure is the effect The first 1. This is a a scale changein a graphsuch as changein heightof the priceschedule, 4. The secondkindis theresultant figure change, including feedback effects, on the actual volumeof sales by each firm and by the market as a whole. The latter, overallresultant is easierto compute:whenthe shift constant k = 0 (White1981,eqq. [25] and [26]), all regions yield the same proporforthe aggregate tionality volumeof the marketW,namely,
W , (rclq a) y/(c-ay).
(A1)
of trade-offs in It befits as a balancing the natureof market formation, dispersions (see fig.2), thatthe market volumevarieswithvaluationscale c of cost variationwithvolume; and, similarly, factorr to the exponent of W on costs scale q is through dependence q raised to the powera of to valuation.But note that market sales total goes volume'scontribution ofmarket downas costscale goesup. It is also obviousthatthe sensitivity size to eitherscale factorincreasesas the demand-saturation exponent rises-as y becomescloserto c/a. Even moreobviousis the factthat this of changein costs or valuationscales on market net feedbackresultant b/don thequality sales in aggregate does notdependat all on thetrade-off thenumerical results dimension! above These findings generalize presented forthree illustrative markets. But visible changesin the marketscheduleW(y), the price schedule and this formitself take quite a different perceivedby producers, form, in the trade-offs 3. Ratherthan to region differs according plane of figure I have illustrated in White1981,eqq. [28]-[30]), quote the formulae (from is. And there thechangein form howdramatic thethree detailedexamples on thechanged ofeach individual firm are indicated thechangedlocations schedule. 544
WhereDo MarketsCome From? PriceStructure Implicitin the divergence (in textabove,eqq. [13] and [14]) betweenthe is variation of volume, two Giniindices, forsales volumeand forphysical in White (1981) reports the predicted pricewithvolume.The last figure in priceper unit according to total volumesfromvarious provariation of the trade-offs plane. ducersin that market,separately forsubregions ofextrema so thepredicted and existence are specified; (Onlymonotonicity of the particular the given subregion regardless curve holds throughout of theseshapes follows frommy values on qualityindex.The simplicity of cost and valuationschedules of powerfuncby families approximation one regionof the trade-offs plane, the tions.) At variouslocationswithin monotonicurvesrising one can find CROWDED region, price-by-volume or concaveupward! or concavedownward, cally,or falling monotonically, that pricesare a secondary and This plasticity underlines my contention ex postphenomenon. a numerical Consider from one of the earlier illustrations, priceschedule forthelight-aircraft industry (withq = 1 = r, y = 0.7 and take 0 = 1.63, k = 0.5, theprice-volume constant see table 1). In the schedulewithshift to and are (where Piper, respectively, pairs corresponding Beech, Cessna, is pn. priceperunit)
Pn
.440
1.0 .613
.414
1.6 .538
.399
1.9
.503.
Yn
n
ratios ofsalesvolumes among The n valueswerechosen toyieldtheobserved higher quality, light-aircraft manufacturers: higher values mean(as before) so thatBeech is the Cadillacand Piperthe Chevy. It is difficult to obtainreliable on effective prices andphysical information in a givenmarket.It is not sufficient to volumessold forall of the firms obtainpostedpriceschedules represent a or pricebooks,sincetheseoften basis fornegotiation report ofpractices. In any event morethana reliable intoone my modelpresupposes aggregation of all sales by the givenfirm of the corresponding revenueacrossa aggregate volume,and aggregation ofconcrete in different customers. batchesto different dispersion salesprices
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545
Journal of Sociology American

Cohen, Kalman, and Richard Cyert. 1975. Theory of theFirm. 2d ed. Englewood Cliffs, N.J.: Prentice-Hall. Corey,E. Raymond. 1978. Procurement Management: Strategy, Organization and DecisionMaking. Boston: CBI. Corey, E. Raymond, and S. H. Star. 1971. Organization Strategy. Boston: Harvard Graduate School of BusinessAdministration. Dixit, A. K., and J. E. Stiglitz.1977. "MonopolisticCompetition and OptimumProduct EconomicReview67:297-308. Diversity."American Eichner,Alfred ofOligopoly. Baltimore:JohnsHopkins University S. 1969. The Emergence Press. Fortune.1980. "IBM's Battle to Look Superhuman Again" (May 19), pp. 106-12. Mark. In press. "Toward a Sociological Theory of Income Differences." Granovetter, on LaborMarkets, In Sociological edited by Ivar Berg. New York: Academic Perspectives Press. Grossman,S. 1975. "Rational Expectationsand the EconometricModeling of Markets Journalof Econometrics 3:255-72. Subject to Uncertainty." HarvardBusiness Review.1980. Vol. 58 (March-April):82-94. Hayes, Thomas. 1980. "Digital's Mastery in Computers." New York Times (April 7), pp. D1-D5. A. Simon. 1977.SkewDistributions and theSizes ofBusinessFirms. Ijiri, Yuji, and Herbert Amsterdam: North-Holland. Kantor, Brian. 1979. "Rational Expectationsand Economic Thought." Journalof EconomicLiterature 17: 1422-41. Lancaster,Kelvin J. 1966. "A New Approachto ConsumerTheory." JournalofPolitical 74:132-57. Economy Equityand Efficiency: ProductVariety in an Industrial Society. New . 1979. Variety, York: Columbia University Press. Mansfield,Edwin. 1975. Microeconomics: Theoryand Applications.2d ed. New York: Norton. Muth, John F. 1961. "Rational Expectations and the Theory of Price Movements." Econometrica29:315-35. Newman,Peter. 1965. The Theory ofExchange.EnglewoodCliffs, N.J.: Prentice-Hall. and BilateralMarketPower. CamPorter,Michael E. 1976. Interbrand Choice,Strategy, Press. bridge,Mass.: Harvard University New York: AcademicPress. . 1980. Competitive Strategy. in Rosen, Sherwin.1974. "Hedonic Prices and ImplicitMarkets: Product Differentiation 82:34-55. Pure Competition."JournalofPolitical Economy and Division of Labour." Economica45:235-70. --. 1978. "Substitution Salter, Malcolm S., and W. A. Weinhold. 1979. Diversification through Acquisition.New York: Free Press. and EconomicPerformance. New York: Scherer,F. M. 1970. IndustrialMarketStructure Rand McNally. Schwartz,J. E., and Christopher Winship. 1980. "The WelfareApproach to Measuring Inequality." Pp. 1-37 in Sociological Methodology 1980,edited by Karl Schuessler.San Francisco: Jossey-Bass. Shiskin,Julius,and Milo Peterson,eds. 1972. StandardIndustrialClassification Manual. of Managementand the Budget, StatisticalPolicy Division. Washington, D.C.: Office in Hiringand Related Spence,A. Michael. 1974. MarketSignaling:Informational Transfer Mass.: Harvard University Press. Screening Processes.Cambridge, . 1976. "Product Selection,Fixed Costs and MonopolisticCompetition."Review of EconomicStudies43:217-35. Policies. Ann Arbor: Universityof Steiner,Peter 0. 1975. Mergers:Motives,Effects, Michigan Press. or ColluVol. 1, Competition Sultan,Ralph G. M. 1974. Pricingin theElectrical Oligopoly. sion. Boston: Harvard Graduate School of BusinessAdministration. Boston: Harvard Vol. 2, BusinessStrategy. . 1975.Pricingin theElectrical Oligopoly. Graduate School of BusinessAdministration.
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Terleckyj, Nestor E., ed. 1976. HouseholdProductionand Consumption. New York: Columbia University Press (forNational Bureau of Economic Research). White,H. C. 1976. "Subcontracting withan Oligopoly:Spence Revisited."RIAS Working Paper no. 1, Harvard University, September. --. 1978. "Markets and HierarchiesRevisited." Mimeographed.Cambridge,Mass.: Departmentof Sociology,Harvard University, March. 1979. "On Markets." RIAS WorkingPaper no. 16, Harvard University, April. 1980. "Markets as Social Productions." Mimeographed. Cambridge, Mass.: Departmentof Sociology,Harvard University. --. 1981. "ProductionMarketsas Induced Role Structures." Pp. 1-57 in Sociological Methodology 1981, edited by S. L. Leinhardt.San Francisco:Jossey-Bass. Williamson,0. E. 1975. Marketsand Hierarchies:Analysis and Antitrust Implications. New York: Free Press.
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Where Do Markets Come From? Author(s): Harrison C. White Reviewed work(s): Source: American Journal of Sociology, Vol.

Where Do Markets Come From?'

AJS Volume87 Number3

WhereDo MarketsCome From?

Context of Market Phenomenology

across Firms on QualityIndex (n)

(log) Rates Parameters--Proportionate

PARADOX Costs down as quality up d is positive

Costs up as quality up d is negative

Failure due to freeloading

Failure due to h XPLOSIVEg

FIG. 3.-Trade-offsin cost versusvaluation,across growth in quality (ordinate)and in volume (abscissa).

WhereDo MarketsCome From?

MartinMarietta-a , MedusaMarquette >* Univeral Atlas

price firm enters: New equilibrium W(y)

o quality, Low law

of Sociology Journal American

cost level(q) production

.613 .538 .503

.4403 .145 .6633 .364 .7576 .442 Oo=1.63

.440 .414 .399

.487 .388 .350

.3874 .388 .5265 .584 .5777 .645 Oo -1.54

.387 .329 .304

Context:q=1.2, r=1, -y=.7

.508 .446 .417

.3771 .315 .5800 .501 .6684 .566 Oo= 1.64

.377 .362 .352

.372 .296 .268

.549 .3069 .4377 .708 .4889 .755 Oo= 1.68

.307 .274 .257

Context:q=1, r=1.2, -y=.7

.612 .537 .502

.4389 .6614 .7557

.146 .365 .443

.439 .413 .398

.489 .390 .352

.3895 .5286 .5795

.386 .582 .643

.389 .330 .305

Context: q =1, r= 1, y=.9

.783 .663 .612

.466 .371 .335

.3666 .408 .5043 .602 .5556 .662 Oo= 1.61

.366 .315 .292

Context: q=1, r=1, -y=.7 (New Firm Added, Third in Size)

1 1.3 1.6 1.9

.552 .518 .485 .453

.3726 .4775 .5739 .6618

.181 .306 .404 .482

.373 .367 .359 .348

1 1.3 1.6 1.9

.399 .355 .318 .287

.2979 .3677 .4273 .4783

466 .578 .655 .712

.298 .282 .267 .252

WhereDo MarketsCome From? $ A

Kimberly Clark 1) C(y, 0

Proportion Cash Flow

3.33 3.67 4.00

10.38 39.75 128.5

.058 .098 .100

.35 .40 .43