Production Markets Broker Upstream to Downstream, Balancing Their Volume and Quality Sensitivities to Firms Through an Oriented Market Profile of Signals

Abstract

Varieties of quality competition across producers are extrapolated out of the two dual forms of perfect competition, oriented upstream and downstream. Only then are general, path-dependent solutions for market derived (which came first in the previous book of 2002). Attention is focused on advanced markets for high ratios of sensitivities between upstream and downstream relations of producers. Parameter identification and estimations identify impacts from substitutability with cross-stream markets as being major only for certain bands of sensitivity ratios, identified within the state space for production market contexts. Illustrative applications are sketched for strategic manipulations and investment decisions and trends in sectors. * Olivier Favereau and Scott Boorman made helpful suggestions. I benefited from responses to recent talks given at Stanford Business School, at Harvard JFK School Modeling Seminar, at the NAS-NRC Workshop on Dynamic Network Analysis, at the Conventions et Institutions Conference in Paris, at a panel at the ASA Annual Meeting in Atlanta, and especially from students in my graduate seminar in economic sociology at Columbia and at AILUN in Nuoro, Italy. Any large producer—in our economy, some sort of firm—is wedged between upstream context of procurement and downstream context of delivery. It has to commit, each period, to scale of production, but a fog of uncertainty obscures the terms it can obtain, both in costs back to upstream and in revenue from downstream. Figure 1 sketches the producer's quandaries as a graph for valuations versus possible choice of scale—designate that by volume y: FIGURE 1 ABOUT HERE Toward the top are marked ranges of payment levels that ranges of y might induce from downstream players, while the other cross-hatched region toward the bottom is for payments to upstream that may be required for producing at that scope y. In between, where question marks are scattered, is where the producer needs to wedge its own valuations. Clustering into an industry with other producers who come to be seen as similar enhances the reach of any one producer's repute. Together they gain recognition as a line of business, the place to turn for what comes to be seen as the sort of product which all are offering. Each producer is then less vulnerable to disruption of particular ties, upstream and/or down, and the fog of uncertainty thereby lessens. Each producer becomes positioned in a niche within the array on quality that comes to be perceived generally, along lines first suggested by Chamberlin (1933). Favereau, Biencourt, and Eymard-