Industrial Concentration, Price-Cost Margins, and Innovation

This paper explores a panel data set matching establishment-based production statistics from Japan's Census of Manufacturers with wholesale price indices from the Bank of Japan, and Herfindahl indices from the Japan Fair Trade Commission. The data include annual observations over the period 1961-1990, for 74 industries at the 4-digit s.i.c. level. We estimate Cobb-Douglas production functions and Solow residuals for each industry and then use these estimates to further analyze the determinates of industrial concentration and innovation. The industries having great capital intensity, small employment of labor, and with high price-cost margins tend to be more concentrated. Cross-section estimates reveal a U-shaped mapping from concentration to innovation.

Are There Any Cournot Industries?

For 70 Japanese manufacturing industries, I test the simple Cournot hypothesis of proportionality between industry price-cost margin and Herfindahl index against the non-nested alternative that the industry price-cost margin remains constant in the face of varying Herfindahl index, as it would under a simple product differentiated Bertrand framework. I then test each of these against the alternative hybrid specification that nests both of them, and from the pairwise tests, compute likelihoods of each specification. The simple Cournot specification is the most likely for five of the industries, the simple Bertrand specification for 35, and the hybrid specification for 30.

Regulation, Distribution Efficiency, and Retail Density

After outlining characteristics of Japan's distribution sector, a comprehensive international comparison of it to those of other nations is presented and analyzed for underlying differences. This leads to an explanation of Japan's retail store density, which is then related to the structure of wholesale channels. Next, some details on the Large Store Law of Japan and regulatory distortion, including empirical evidence on its extent are offered. Data on the structure of the retail sector by store format and on differences among prefectures in density and format are then presented.

Why are there so many retail stores in Japan?

That Japan's distribution system is inefficient for having so many stores has become a cliché that appears in academic and journalistic writing on Japan as well as in U.S. government position papers. There are two economic arguments on which the inefficiency claim has been based. One is the argument that Japan has a dualistic economy in which the distribution sector, unlike some other sectors, is economically backwards and riddled with anachronistic customs that have a cultural basis rather than an economic basis. The other inefficiency argument has to do with regulation. A succession of Japanese laws over the last half century have imposed bureaucratic obstacles to the establishment of large stores. The abundance of small stores in Japan, broadly speaking, represents an efficient adaptation to the conditions of the country. The remainder of this paper is devoted to constructing an analytic model for explaining the geographic density of retail outlets in an economy and applying the model to the query in the title. In a statistical model, variation across Japan's 47 prefectures in numbers of stores per household is explained both by proxies for household storage and reorder costs and by the severity of regulations impeding large stores

Japanese technology policy

Because Japan was a late developer among the industrial countries, it adopted science and technology policies that hastened the diffusion and dissemination of existing discoveries rather than promoting new discoveries. For example, Japan's patent system encourages the early revelation of new discoveries, promotes patent licensing on terms favorable for users, and affords patent holders only limited rights of exclusivity. By encouraging imitation, Japan's patent system erodes the incentive to develop major innovations but probably does not greatly damage the incentive for large firms to develop minor advances. This explains why most of the private research efforts of Japanese firms have been directed towards development of process innovations with immediate commercial application, not towards basic scientific advances. Public support for research in Japan also reflects some of the same biases as its patent system. In spite of these aspects of Japanese technology policy, Japan has still achieved important contributions to the world's stock of knowledge including the recent perfection and diffusion of the Toyota production management system

Indirect shareholding within Japan's business groups

A new measure of indirect shareholding is proposed and estimated for Japan's six major keiretsu groups. For these groups indirect shareholding by each firm in each other firm is about one fourth as great as direct shareholding on average. Where there are gains to firms from holding stock in other firms, there are also gains from indirect stockholding. Alignment of the firms into groups maximizes indirect shareholding

Japan's labor unions

The various labor laws enacted in Japan in the Occupation era, and still in effect today without substantial amendment, legitimized unions, both as bargaining units on behalf of the employees of large companies and as political organizations, but prohibited strikes by public employees, and did not lead to the establishment of valuable labor monopolies. The effective bargaining units in wage negotiations in Japan are mostly enterprise unions, whose respective members are employees of a given company. This does not preclude their having succeeded in raising members' wages. Japan's infrequency and short duration of strikes is a poor indication of the effectiveness of its labor unions at obtaining higher wages for their members. The smallness of losses due to strikes in Japan means only that there is little discrepancy between the unions' and employers' information regarding the employers' maximum willingness to pay a premium for union members' services. It does not necessarily mean that the premium itself is small. Enterprise union members in Japan mostly include the regular employees of large firms, trained in company-specific skills and expectant of long ultimate tenures of service. Compared to members of a typical industry-wide union in the U.S. or elsewhere, the members of a Japanese enterprise union are relatively homogeneous and have had a longer time in which to observe the behavior of their employer. For both these reasons, it is quite natural to suppose that union members in Japan should be relatively well-informed regarding their employers' willingness to pay a premium for their services