Technology and Organization and Firm Size (Re-Redux)

15 August 2008 at 2:39 pm Dick Langlois Leave a comment

| Dick Langlois |

I blogged a while back about the recent Dosi et al. paper in Capitalism and Society, which basically claims that, since firm size distributions (as they model them) have not changed much over time, it must be the case that recent technological change has not led to greater vertical specialization in industry. My response to this claim, which should be published soon, points out that firm size in the sense of price theory (as measured by output, employees, etc.) tells us nothing at all about firm size in the sense of Coase (number of transactions or stages of production within the firm’s boundaries). Vertical specialization does not imply small size — it may even mean larger firms. A recent NBER paper by four University of Chicago economists sheds light on this point. There is evidence, notably in a well-known paper by Erik Brynjolfsson and coauthors, that, at least before 1994, investment in ICT technology tended to make firms smaller. But there is another way in which ICT, in the form of the Internet, can make firms bigger. As this NBER paper shows, in reducing search costs in areas like new-car sales and bookstores, the Internet tended to increase the average size of the firm by driving the smaller less-efficient firms out of business and increasing the (price theory) size of the more efficient. Note that such an increase in size is not a resurgence of the Chandlerian multi-unit enterprise. Despite its diversification into many different products, even Amazon is still highly specialized vertically.