Archive for May, 2008

Lien-Klein Paper on Relatedness

| Peter Klein |

Lasse and I have a new paper on the measurement of relatedness, the degree to which a diversified firm’s markets or industries are “close” to each other. Relatedness is a key concepts of corporate strategy, but it is difficult to define and measure consistently. We discuss a new, “survivor-based” approach and compare it to conventional measures. The survivor-based approach lets the competitive process and the knowledge of local decision makers replace the judgment of the researcher (or the SIC system) in determining what is related to what, giving it a Hayekian flavor. Specifically, we measure the relatedness between a pair of industries by comparing how often they are actually combined to what one would expect if diversification patterns were random. Industries are related when this difference is large and positive, and they are unrelated if it is negative. This concept was originally suggested by Teece, Rumelt, Dosi and Winter (1994) who used it to illustrate persistent patterns of “coherence” among US firms.

The paper, “Measuring Inter-Industry Relatedness: SIC Distances versus the Survivor Principle,” is available on SSRN. Here’s the abstract:

The conventional approach to measuring inter-industry relatedness uses the SIC system to capture the “distance” between industries. While relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This paper constructs an alternative, survivor-based measure of inter-industry relatedness and compares it to similar measures based on distances between SIC codes. We find that survivor-based measures consistently outperform SIC-based measures in predicting firms’ decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.

31 May 2008 at 11:10 pm 2 comments

A Radical New Idea

| Peter Klein |

Dynamic pricing is a relatively new idea that reflects consumer demand. If a show is popular, the system will increase the price of that show. Once it loses steam, the price will be lowered proportionally.

Prices that adjust according to supply and demand! Who’d a thunk it?

To be fair, the writer, CNET’s Don Reisinger, is talking about Apple’s plans to offer variable pricing on iTunes. But it’s still a startling statement, to an economist. I guess I shouldn’t really be surprised, though.

31 May 2008 at 5:15 pm 1 comment

Westgren at Missouri

| Peter Klein |

Those of you within driving distance of Columbia, Missouri should come over Monday (2 June) for a seminar by Randy Westgren, “The Entrepreneurial Niche,” at 2:00 2:30pm in 217 Mumford Hall. Abstract below the fold. The talk is sponsored by the McQuinn Center for Entrepreneurial Leadership. Email me for details. (more…)

30 May 2008 at 2:29 pm 2 comments

Mike and Me on Externalities

| Peter Klein |

Mike Moffatt responds to my post on externalities. I questioned the Pigouvian approach of using taxes as efficient remedies for negative externalities. I said if, say, carbon taxes are a good idea, then Pigouvian taxes on a range of activities that generate negative externalities should be even better. And what about Pigouvian subsidies? I rarely see members of the Pigou club explain what activities they would subsidize, at what rates, and with what resources.

Mike’s response, based on more detailed comments here, is interesting, but to my mind misses the main point. Pigouvian taxes aren’t perfect, Mike says, but neither are income taxes or excise taxes or any other taxes. Fine, I say, but the relevant comparison isn’t between Pigouvian taxes and other taxes, but between Pigouvian taxes and alternative institutions for dealing with externalities such as cap-and-trade, common-law tort remedies, etc. (more…)

30 May 2008 at 9:15 am 7 comments

Langlois and Lien Join the O&M Team — and Foss Is Back

| Nicolai Foss |

Since its inception in April 2006 Peter and I have been running this operation as a two-man show (with the help of some terrific guest bloggers). Peter has been the main man for the past several months, because of the time-consuming bureaucratic nightmares that I have been immersed in. The rumours that have been spreading about my virtual death are, however, exaggerated, and I will make a comeback attempt here at O&M.

Furthermore, while Peter and I enjoy writing about our own idiosyncratic interests, we think the time is right to broaden O&M’s scope by adding some permanent bloggers to the team. So, we’re pleased to announce that our longtime friends, collaborators, and former guest bloggers Dick Langlois and Lasse Lien have agreed to come on board.

Langlois is professor of economics at the University of Connecticut and adjunct professor of strategy and business history at the Copenhagen Business School. He writes on the theory of the firm, organizational boundaries, technology, the economics of institutions, the history of economic thought, and economic methodology.

Lien is associate professor of strategy and management at the Norwegian School of Economics and Business Administration (NHH). He works in corporate strategy with an emphasis on diversification, mergers and acquisitions, and strategic positioning.

Welcome, guys!

30 May 2008 at 12:55 am 2 comments


| Peter Klein |

Facebook founder Mark Zuckerberg, reports the NY Times, skipped his college art history class:

When it came time for the end-of-term study period, he was too busy building the prototype of Facebook to bother to do the reading. So in an inspired last-minute save, he built a Web site with all of the important paintings and room for annotation. He then sent an e-mail to the students taking the class offering it up as a community resource.

In a half an hour, the perfect study guide had self-assembled on the Web. Mr. Zuckerberg noted that he passed the course, but he couldn’t remember the grade he received.

The pointer is from Joshua Gans, who calls this “an example of Wikicheatia or of Study Group 2.0.”

29 May 2008 at 12:08 pm 2 comments

Middle Managers in the Theory of the Firm

| Peter Klein |

The current issue of Knowledge@Wharton features a piece on the challenges facing middle managers. The middle-management role is typically high in responsibility and low in authority — middle managers are accountable for the performance of their subordinates but selective intervention from above makes it difficult for them to commit to particular incentive schemes. Moreover:

[T]op reasons for dissatisfaction among middle managers include micromanagement by senior managers and lack of respect, says [author David] Sirota. “And sometimes the senior leader is just really ineffective; middle managers don’t want to be in a company that is run by that type of person.” . . .

Navigating the various relationships upward, downward and horizontally can be an emotional management challenge, adds Wharton management professor Sigal Barsade. “This is particularly noticeable with organizational change. If you are a middle manager, there may be a change that you didn’t have much to do with, but you need to translate it to your people and make them feel protected and valued. However, you are also someone being impacted by the change. Because you didn’t design the change, you might be left feeling like you don’t know what to do yourself, but you still need to comfort, protect and inspire your people.”

A more colorful description is provided by Chef Shuna Fish Lydon who blogs on all things culinary at eggbeater. Here she is on the role of the sous chef: (more…)

29 May 2008 at 9:32 am Leave a comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).