This paper analyzes the fundamental changes in market structures that may result from the increasing use of information technology. First, an analytic framework is presented and its usefulness is demonstrated in explaining several major historical changes in American business structures. Then, the framework is used to help explain how electronic markets and electronic hierarchies will allow closer integration of adjacent steps in the value added chains of our economy. The most surprising prediction is that information technology will lead to an overall shift toward proportionately more coordination by markets rather than by internal decisions within firms. Finally, several examples of companies where these changes are already occurring are used to illustrate the likely paths by which new market structures will evolve and the ways in which individual companies can take advantage of these changes.

It is often argued that as electronic markets lower the cost of market transactions, traditional roles for intermediaries will be eliminated, leading to "disintermediation." We discuss the findings of an exploratory study of intermediaries in electronic markets, which suggest that markets do not necessarily become disintermediated as they become facilitated by information technology. We explore thirteen case studies of firms participating in electronic commerce and find evidence of certain new emerging roles for electronic intermediaries, including: aggregating, matching suppliers and customers, providing trust, and providing inter-organizational market information. Two specific examples are discussed in greater detail to illustrate an unsuccessful strategy for electronic intermediation (BargainFinder) as well as a successful one (Firefly). KEY WORDS AND PHRASES: electronic data interchange, electronic markets, intermediaries, Internet commerce.

We model the distortions that internal power struggles can generate in the allocation of resources between divisions of a diversified firm. The model predicts that if divisions are similar in the level of their resources and opportunities, funds will be transferred from divisions with poor opportunities to divisions with good opportunities. When diversity in resources and opportunities increases, however, resources can flow toward the most inefficient division, leading to more inefficient investment and less valuable firms. We test these predictions on a panel of diversified U.S. firms during the period from 1980 to 1993 and find evidence consistent with them. THE FUNDAMENTAL QUESTION IN THE THEORY of the firm, raised by Coase ~1937! more than 60 years ago, is how decisions taken inside a hierarchy differ from those taken in the marketplace. Coase suggested that decisions within a hierarchy are determined by power considerations rather than relative prices. If this is indeed the case, why, and when, does the hierarchy dominate

Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information. We find that large banks are less willing than small banks to lend to informationally “difficult ” credits, such as firms that do not keep formal financial records. Moreover, controlling for the endogeneity of bank-firm matching, large banks lend at a greater distance, interact more impersonally with their borrowers, have shorter and less exclusive relationships, and do not alleviate credit constraints as effectively. All of this is consistent with small banks being better able to collect and act on soft information than large banks.

Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong. In essence, this is the case for capitalism over socialism, explaining the "dynamic vitality" of free enterprise. The great economists of the 1930s and 1940s failed to see the dangers of socialism in part because they focused on the role of prices under socialism and capitalism, and ignored the enormous importance of ownership as the source of capitalist incentives to innovate. Moreover, many of the concerns that private firms fail to address "social goals" can be addressed through government contracting and regulation, without resort to government ownership. The case for private provision only becomes stronger when competition between suppliers, reputational mechanisms, the possibility of provision by private not-for-profit firms, as well as political patronage and corruption, are brought into play.

Abstract not found

We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. Using plant level data, we find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior. SEVERAL RECENT ACADEMIC PAPERS and the business press claim that conglomerate firms destroy value and do a poor job of investing across business segments. 1 Explanations for this underperformance share the idea that there is an imperfection either in firm governance ~agency theory! or in financial markets ~incorrect valuation of firm industry segments!. These studies implicitly assume that the conglomerates and single-industry firms possess similar ability to compete, and that they differ mainly in that conglomerates

Transactions take place in the rm rather than in the market because the rm o ers agents who make speci c investments power. Past literature emphasizes the allocation of ownership as the primary mechanism by which the rm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because: i) the power agents get from access is more contingent on them making the right investment; ii) ownership has adverse e ects on the incentive to specialize. The theory explains the importance of internal organization and third party ownership. A preliminary version of this paper circulated with the title \Implicit Property Rights in a Theory of the

Abstract not found

This paper evaluates the importance of “property rights institutions”, which protect citizens against expropriation by the government and powerful elites, and “contracting institutions”, which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong firststage relationships between property rights institutions and the determinants of European colonization strategy (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using this instrumental variables approach, we find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible explanation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions, but are unable to do so against the risk of expropriation.