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ABSTRACT
Josef Steindl offers an innovative dynamic analysis of competition in Maturity and Stagnation in American Capitalism, with a key role for technical change. However, in his later writings he suggests that he
had not gone far enough and that his account was not sufficiently dynamic, noting particularly his
neglect of fundamental issues in technological development. Here, we critically examine the nature of
technical change in Steindls analysis, pointing to ambiguities and contradictions that arise. Standard
characterizations of the nature of technical change are then introduced and used to further integrate
technical change into Steindls analysis of competition.
1. INTRODUCTION
287
Bloch (2000a) discusses at length Steindls analysis of imperfect competition and its relationship to contemporary and subsequent analyses.
2
Bloch (2000b) compares Steindls ([1952] 1976) analysis of progressive firms and the dynamics of competition to Schumpeters ([1934] 1961, [1942] 1950) analysis of creative destruction.
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2. STEINDLS ANALYSIS
2.1
Initial observations
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trade cycle (Steindl, [1952] 1976, p. 15). The essential implication of price
rigidity for the purpose of examining the impact of technical change on
dynamic competition is that firms capture the gains from cost-saving technology, at least in the first instance.3
Finally, Steindl notes large differences in costs across firms in the same
industry. He argues that unit cost decreases with firm size, using prior studies
and his own examination of US data for firm costs grouped by size (see
Steindl, [1952] 1976, table 6, pp. 2635). He further suggests that the lower
unit costs for large firms cannot be obtained by all firms due to the scarcity
of big units of capital. The argument for the scarcity of big units of capital
is drawn from his earlier monograph, Small and Big Business (Steindl, 1945),
which is in turn related to Kaleckis (1937) principle of increasing risk.4
The implications of cost differentials in Steindls analysis depend on the
actual or potential competitive pressure in an industry. When there is excess
capacity in the industry, the pressure is actual and a struggle for survival is
likely, in which probably the highest cost producer, called the marginal firm,
is eliminated. However, in many industries the competitive pressure is not
actual and the marginal firm is making considerable profits (Steindl, [1952]
1976, p. 38).
2.2
The differential profits of progressive and marginal firms, which can be considered as differential rents, provide the foundation for Steindls analysis of
the pattern of competition. He links the profits to the expansion of a firms
productive capacity through making critical assumptions about investment
spending. In particular, he assumes that the increase in the entrepreneurial
capital of firms is through what he calls internal accumulation, namely by
retaining part of the profits in the form of saving. Further, he assumes that
firms invest only in their own industry (Steindl, [1952] 1976, p. 41). Thus, the
Steindl bases his observations and analysis on the interwar period in which prices of manufacturing inputs were stable or declining. In his analysis, product prices are stable unless something causes them to change, namely competitive pressure brought on by excess capacity.
Correspondingly, under conditions of rising input prices product prices would rise at the average
price of inputs. This equates to the case of pricing based on normal costs without allowance for
productivity improvements.
4
Whether the scarcity of big units of capital is still relevant in the 21st century is arguable.
However, limited knowledge and experience of firms still provide a rationale for a preference to
invest retained profits in the industry in which they have been generated.
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Steindl justifies the investment in the same line of business by noting that this is what the firm
knows best. However, in the preface to the new edition of Maturity and Stagnation in American
Capitalism, he acknowledges the restrictiveness of this assumption when he notes that, The big
corporations have generally spread their activities to several lines each. Impediments against
the flow of funds should therefore play no role today (Steindl, 1987, p. xii). For studying the
process of competition within an industry, we still find it useful to follow Steindls initial assumption of restricting investment to the original line of business. This allows us to see more clearly
the implications of the linkage between investment and technical change. Considering the spread
of investment over several industries would tend to obscure, but not completely remove, these
implications. However, as noted by a referee, the linkage between firms differential profitability, investment and technological cost reductions is broken when firms choose the destination
of their investment without regard to previous experience, only looking to the rate of return
earned by incumbents in that industry. In this case it is no longer possible to deduce the evolution of firm structure in an industry.
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The extra sales effort, either in the form of aggressive marketing or in the form of reduced
prices, will tend to increase the rate of growth of industry sales. This will make some room for
extra output from the marginal firms without reducing output from marginal firms. However,
there is still an increase in the relative size of the intramarginal firms, else the extra sales effort
of these firms would not have been necessary.
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Harry Bloch
Competition in Steindls ideal pattern is self-destructive. Aggressive competition in the phase of absolute concentration is not unlimited. Eventually,
the elimination of marginal firms leaves a survivor group of large firms with
similar low costs. These firms recognize the difficulty of driving each other
from the industry and abstain from further aggressive competition. Avoidance of aggressive price competition by the surviving firms in Steindls analysis is perhaps best understood as learned behaviour, similar to behaviour of
rational players in a repeated non-cooperative game with a fixed number of
players. Overt collusion could give the same result. However, Steindl is silent
on explaining the mechanism by which firms are able to avoid the prisoners
dilemma outcome of aggressive competition.
The surviving firms also abstain from increasing capacity beyond the
growth of demand. The behaviour of firms in this ultimate phase of competition matches that of firms in industries where entry is difficult for reasons
of economies of scale or other barriers. Thus, oligopoly becomes a condition towards which industry evolves. It is this tendency towards oligopoly as
the conclusion to the process of competition that provides the distinctive
feature of Steindls analysis of imperfect competition.
2.3
Steindl starts his analysis of the process of competition by stating that technical progress and cost reductions are an essential part of development
(Steindl, [1952] 1976, p. 40). As noted above, cost-reducing technical change,
as well economies of large scale, can be the source of cost advantages for
some firms.7 Indeed, Steindl identifies a special group of firms that lead in
productivity increases and reduced costs, which he calls progressive firms
(Steindl, [1952] 1976, p. 45). Thus, technical change is an important source
of the cost differences that lie at the heart of Steindls analysis.
Steindl also argues that the adoption of new technology by progressive
firms enhances internal accumulation and expansion of capacity through
reducing costs and raising profit margins. There is a positive feedback from
internal accumulation and capacity expansion to further technical change.
Thus, technical change is identified by Steindl as a factor that can generate
a dynamic process of new profit opportunities and increased internal accu-
Economies of scale are a source of cost advantage for larger firms when firms differ in size
and when the economies are internal to the individual firm rather than realized by the entire
industry.
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3. EXTENSIONS
3.1
Technical change may take the form of an innovation available to all firms
in an industry, generally as a result of technical activity outside the industry,
especially by equipment-supplying firms. Adoption of such an innovation
generally will require some investment in new equipment by firms. We emphasize this investment linkage by focussing on capital-embodied technical
change as an example of innovation available to all firms in an industry. A
common variant is the vintage-capital model, in which improvements in technology can only be accessed through acquisition of new equipment. Once
equipment is purchased, its technology and productivity is fixed for the duration of its useful life. The rate of technical change is therefore directly linked
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lack of internal accumulation means they are prevented from lowering their
operating cost through the purchase of new equipment.
The cost advantage of the progressive firms leads to their relative growth.
Further, their cost advantage grows with the expansion of their capacity, furthering their rate of expansion. When this growth rate exceeds the growth of
industry demand, competitive pressure intensifies, moving first to the moderate competitive pressure associated with relative concentration and then to
the aggressive competitive pressure associated with absolute concentration.8
Finally, once the share of marginal firms is reduced sufficiently, the incentive
for further aggressive competition is removed, providing the conditions for
mature oligopoly.
The above discussion suggests a pattern of competition that aligns well
with Steindls ideal pattern. However, in identifying the group of progressive firms, Steindl argues that it is essential that not all firms are capable of
adopting the technical advances that lead to lower costs (Steindl, [1952] 1976,
p. 45). In the vintage-capital model, access to the methods of the progressive
firms requires only the purchase of new equipment. Thus, there is at least
one respect in which the adaptation of Salters vintage-capital model does
not fit with Steindls assumptions. This turns out to have serious implications
for the likelihood of an industry exhibiting the ideal pattern of competition
when technical change is accomplished by the purchase of new capital equipment, as in the vintage-capital model.
Marginal firms are not able to access the methods of progressive firms
through acquisition of new equipment due to their lack of internal accumulation. However, firms with costs between those of the marginal and progressive firms do have internal accumulation and are thus able to realize, at
least in part, the cost reduction associated with new equipment. Further,
entrants, who by their position are acquiring production capacity for the
first time, are in a particularly good position to challenge the dominance of
established progressive firms.9 This undermines the distinction between
8
This suggests a link between productivity and competition. In particular, firms whose operating costs are above the average total cost of new equipment can continue to operate only in
industries where competitive pressure is low enough to allow price to rise above the cost of new
equipment. Intensification of competitive pressure with the expansion of capacity by progressive firms leads to a rise in productivity. The expansion not only increases the share of output
coming from high productivity capacity during relative concentration, but marginal firms with
high operating costs and low productivity are eliminated from the industry during absolute
concentration.
9
Airlines seem to provide an example of an industry in which this possibility has been realized.
New entrants, such as Virgin Atlantic, have been able to undermine the cost advantage of the
established progressive firms, at least in part, by operating fleets consisting solely of new generation aircraft with lower operating costs per passenger seat mile.
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progressive firms and other firms that is central to the ideal pattern of competition. Any firm that acquires new equipment achieves the methods associated with the lowest operating costs and hence the highest possible gross
profit margin.
To summarize, industries characterized by capital-embodied technical
change, as assumed in vintage-capital models, are unlikely to exhibit Steindls
ideal pattern of competition. Absolute concentration is possible when some
progressive firms achieve an initial cost advantage, with the extra profits
achieved reinvested into expansion of productive capacity (Steindl, [1952]
1976, p. 45). However, internal accumulation by intramarginal firms or entry
of new producers can upset the pattern, for these firms can access the
methods of the progressive firms through the acquisition of new equipment.
This undermines the cost advantage of the progressive firms, so that their
profit rate and internal accumulation is no longer the only trigger for intensification of competition. The link between the expansion of demand and
the rate of profit that occurs in the ideal pattern of competition is broken.
Instead, the intensity of competition may increase and the rate of profit may
fall as a result of entry that is independent of the growth of demand, reflecting simply the migration of small producers between industries in search of
higher profit rates.10
3.2
Learning by doing
10
Steindl ([1952] 1976) stresses the role of economies of scale as well as technological innovation as a source of cost advantage. If there are substantial economies of scale, a new entrant
may operate at a cost disadvantage to progressive firms even when they can acquire capital
equipment that embodies best-practice technology. This is particularly true if the entrants have
limited access to finance, so that they would normally start operations at a small scale. However,
this implies that entry is difficult, and as Steindl notes in discussing the implications of difficult
entry for the pattern of competition, We conclude that in this case the working of competition
as previously discussed is considerably impaired (Steindl, [1952] 1976, p. 53). Thus, with
economies of scale, an industry where the assumptions of the vintage-capital apply is not likely
to fit Steindls ideal pattern of competition.
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the same concept may be applied at the level of the individual producer on the
assumption that the learning that occurs is specific to the particular firm.11
In this case of learning by doing, progressive firms may be early entrants
who have a higher cumulative output than later arrivals. Alternatively, they
may be firms that achieve a cost reduction through the adoption of new
methods more quickly than their competitors. In either event, a current cost
advantage translates into a higher rate of internal accumulation and faster
expansion of capacity under Steindls assumptions. This implies a faster rate
of increase in cumulative output, all other things constant, and, hence, a
faster rate of productivity growth and cost reduction. The cost advantage of
the progressive firms therefore grows continuously.
As in the case of the vintage-capital model discussed above, cost reductions occurring with internal accumulation when there is learning by doing
reinforce the cost advantage of progressive firms. This speeds the internal
accumulation by these firms, impelling them to intensify competition when
their internal accumulation exceeds the growth in market demand. This
enhances the move towards relative and absolute concentration in Steindls
ideal pattern of competition.12 However, unlike the case of the vintagecapital model, there is no prospect that the cost advantage of the progressive
firms is undermined by entry. Entrants start with no cumulative output and
hence should have relatively high costs.
Steindl recognizes that there are limits to the productivity increases and
cost reductions that can be achieved with learning by doing as expressed in
the progress function. In particular, he notes that the learning effect should
diminish as a firm continues production with the same product and same
equipment (Steindl, [1952] 1976, p. 86). With a rigid price, the gross profit
margin and amount of internal accumulation then tend to stabilize, relieving the potential that investment leads to accelerating growth of excess capacity. Even so, conditions of technology characterized as learning by doing
seem especially favourable to Steindls ideal pattern of competition.
11
This type of organizational learning or development of firm capabilities differs from the type
of learning by doing associated with on-the-job training. The latter type generates workerspecific skills or human capital that can be transferred between firms and, therefore, need not contribute to the type of sustainable cost differences that are achieved by Steindls progressive firms.
12
It is interesting that Steindl ([1980] 1990) cites the case of airframe manufacturer in explaining the phenomenon of learning by doing in terms of a progress function. Commercial jet aircraft manufacture has experienced a pattern of competition that seems to fit well with Steindls
ideal pattern. Boeing has built on its learning by doing to drive all domestic competition from
the US industry, with only the Airbus consortium continuing to provide competition in the world
market through consolidation of previously independent European producers into a single largescale enterprise.
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3.3
Harry Bloch
Innovation
299
Shapiro purposefully uses the Schumpeterian phrase, creatively destroyed, in this argument.
The relationship between Schumpeters analysis of dynamic competition and that of Steindl is
examined in Bloch (2000b).
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Harry Bloch
margins are not particularly high. Here, innovation offers the entrant the
potential for overcoming the barrier of imperfect competition.15
4. CONCLUSIONS
We find that introducing specific assumptions concerning the characterization of technical change into Steindls analysis of imperfect competition
reveals substantial differences in the implications for the pattern of competition. In particular, when technical change is characterized as learning by
doing, utilizing Steindls assumptions about imperfect competition yields a
pattern with rapid growth of progressive firms, leading to aggressive competition by these firms with the relative and absolute concentration of industry, and finally, to maturity with oligopoly. A similar pattern emerges when
technical change takes the form of process innovations by progressive firms.
The pattern of competition resulting from the analysis with either of these
characterizations fits that discussed by Steindl as his ideal pattern of
competition.
Other characterizations of technical change that are examined above
are not so favourable to the establishment and maintenance of Steindls
ideal pattern. When technology is embodied in capital equipment, as in the
vintage-capital model, other firms that purchase new equipment have access
to the same technology as progressive firms. This destroys the cost advantage
of the progressive firms, potentially leading to aggressive competition that is
independent of the amount of internal accumulation by the progressive
firms, thereby breaking the relation in Steindls ideal pattern between profit
margins of the progressive firms and the growth of market demand. Similar
results emerge when technical change occurs by way of process innovations
introduced by new entrants.
Technical advance in the form of new product development can also lead
to a pattern of competition that diverges from Steindls ideal. In particular,
product development by progressive firms that impacts on product demand
upsets the relation between profit margins and the normal growth of market
demand. In extreme cases, new products become the basis of new industries
or the competition with firms in other industries. Finally, product innovation
15
An example of the use of innovation by an entrant coming into a low-profit industry is given
in the US steel industry. Nucor, a company producing steel from mini mills, used the adoption
of a thin-slab casting technology to successfully enter the market for flat-rolled steel sheet
in competition with companies such as US Steel (see Ghemawat, 1997, ch. 6, for a detailed
discussion).
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by new entrants upsets the oligopolistic stability that Steindl argues represents maturity in the ideal pattern of competition.
In closing, it should be noted that the results regarding the pattern of competition that emerges under each of the characterizations of technical change
examined in this paper are based on exclusion of consideration of the role
of economies of scale, which are central to Steindls own analysis. Otherwise,
we adopt the assumptions and approach of Steindls analysis of imperfect
competition. What is argued is that Steindls own conclusions regarding the
emergence of an ideal pattern of competition are supported only with some
characterizations of technical change, namely those in which technological
advance occurs through learning by doing within the firm or through process
innovation by progressive firms. For the other characterizations of technical
change, Steindls analysis of imperfect competition is still relevant, just not
wholly determinant of the pattern of competition that is likely to occur in
the industry.
Contrary to rejecting Steindls analysis, what is suggested is the need for
its further development. We have considered three specific characterizations
of technical change, each of which is possible a priori. There remains a need
to consider other possible characterizations of technology, to explore the
impact of combining different characterizations, and, perhaps most importantly, to consider the possibility that the pattern of competition impacts on
the character of technology that develops in a particular industry. Thus, we
have provided an introduction to a research agenda for modelling a process
of cumulative causation, which involves technical change, accumulation and
market structure along Steindls lines.
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Harry Bloch
School of Economics and Finance
Curtin University of Technology
GPO Box U 1987
Perth, WA 6845
Australia
E-mail: Harry.Bloch@cbs.curtin.edu.au