Academic journal article Journal of Economic Issues

Coordination of Distribution in a Monetary Theory of Production

Academic journal article Journal of Economic Issues

Coordination of Distribution in a Monetary Theory of Production

Article excerpt

Much of the recent work on the theory of the firm originates in Oliver Williamson's use of transaction costs to explain the rise of the modern corporation as a superior organization that permitted more efficient managerial coordination of otherwise costly market transactions. In both transaction cost analysis and standard microeconomic theory, firms reduce all costs, be they production or transaction, to a minimum.

I argue here that a more useful understanding of modern firms is provided by the monetary theory of production developed by two observers of the rise of modern corporations, Thorstein Veblen and John Maurice Clark. In a monetary theory of production, the central focus for analysts of the firm is neither production nor transactions, but rather "selling the product for money" [Dillard 1980, 265]. To use Marx's shorthand formulation, the goal is to convert M into a larger M', with production of C being merely a step in the process. Historical evidence suggests that to achieve this end, firms did not and could not economize on selling costs, even if they reduced production costs and transaction costs through mass production and bureacratic organization.

Advertising and Selling Efforts

In the standard production-cost theory of the firm, distribution has been given scant attention, aside from analysis of transportation costs and their contribution to the unit costs of delivering output to consumers [Scherer and Ross 1990, 106-107]. Advertising has also not been treated as a central concern because it is considered to be relevant to only a "relatively few consumer goods industries" [Shepherd 1990, 386].(1) For large firms in these industries, advertising is treated as another input, the use of which the firm seeks to economize. Advertising expenditures can be spread over a large output of goods or services, and large firms can achieve the desired economies of scale in advertising through both scale effects and repetition effects [Comanor and Wilson 1974, 48-49]. Non-cost considerations are also examined: large firms with large advertising expenditures, especially those selling in national markets, can decrease the elasticity of demand for their products [cf. Shepherd 1990, 386ff.; Scherer and Ross 1990, 574ff], and create an important barrier to entry [Bain 1956].

In transaction-cost theories of the firm, distribution and advertising have been treated as problems encountered by producers in providing reliable information about their products to potential consumers. Distribution-seen as exchange transactions between vertically linked producers and their distributors - has been interpreted in principal-agent terms where the producer - or principal - must hire distributors - or agents - to sell its product, and where the interests of producer and distributor may diverge [Carlton and Perloff 1994, 522ff]. This approach is an improvement because it assigns some importance to distribution. However, the assumption that opportunistic behavior affects transactions between producer and distributor is based on the more basic assumption that demand for products is exogenous. The problem is not how to sell the product, but rather how to guarantee that an independent distributor will exert optimal effort to inform consumers about its desirable qualities through nonstandard vertical contracts or even forward integration into the distribution stage [cf. Martin 1993; Carlton and Perloff 1994]. In either case, distribution is treated, implicitly or explicitly, as a subheading under production.

Transaction-cost analysts treat advertising as a way for producers to signal consumers about the quality of their products, while retaining the general view that firms use advertising to shift their demand curves. Normal market exchange is thought to become increasingly inefficient for products differentiated on the basis of quality rather than on the more easily observable differences in size, color, and price [Williamson 1986, 145]. …

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